Microsoft Corporation (MSFT) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings report reveals strong financial performance with significant revenue and EPS growth, driven by demand across various segments. Despite a decline in free cash flow, commercial bookings surged, indicating robust future growth. The Q&A highlighted confidence in CapEx investments and AI-centric hardware, though some concerns about ROI and backlog durability were not fully addressed. Overall, the positive financial metrics and optimistic guidance, especially in AI and cloud services, suggest a likely stock price increase, despite some investor concerns.
Key Financial Performance
Microsoft Cloud revenue $51.5 billion, up 26% year-over-year, driven by strong demand across workloads, customer segments, and geographic regions.
Revenue $81.3 billion, up 17% year-over-year, driven by growing demand for offerings and focused execution by sales teams.
Gross margin dollars Increased 16% year-over-year, driven by efficiency gains in Azure and M365 Commercial Cloud, partially offset by investments in AI infrastructure.
Operating income Increased 21% year-over-year, driven by strong revenue growth and efficiency gains.
Earnings per share (EPS) $4.14, up 24% year-over-year, driven by strong financial performance and adjusted for the impact from investment in OpenAI.
Capital expenditures $37.5 billion, with 2/3 spent on short-lived assets like GPUs and CPUs to meet growing Azure demand and AI usage.
Free cash flow $5.9 billion, decreased sequentially due to higher cash capital expenditures.
Commercial bookings Increased 230% year-over-year, driven by large Azure commitments from OpenAI and Anthropic, as well as healthy growth across core annuity sales motions.
Microsoft 365 Commercial Cloud revenue Increased 17% year-over-year, driven by consistent execution and increasing contribution from strong Copilot results.
Dynamics 365 revenue Increased 19% year-over-year, with continued growth across all workloads.
LinkedIn revenue Increased 11% year-over-year, driven by Marketing Solutions.
Azure and Other Cloud services revenue Grew 39% year-over-year, driven by strong demand across workloads, customer segments, and geographic regions.
Windows OEM revenue Grew 5% year-over-year, driven by strong execution and benefit from Windows 10 end of support.
Gaming revenue Decreased 9% year-over-year, driven by first-party content impact across the platform.
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Operating Highlights
Microsoft Cloud Revenue: Surpassed $50 billion for the first time, up 26% year-over-year, driven by AI and platform demand.
AI Business: Built an AI business larger than some of Microsoft's biggest franchises, with significant advancements in AI infrastructure and tools like Copilot and Foundry.
Microsoft 365 Copilot: Achieved record growth with 15 million paid seats, up 160% year-over-year, and significant enterprise adoption.
GitHub Copilot: Strong growth with 4.7 million paid subscribers, up 75% year-over-year.
Fabric Analytics Platform: Annual revenue run rate exceeded $2 billion, with 31,000 customers and 60% year-over-year growth.
Global Data Center Investments: Expanded data center investments in 7 countries to support local data residency and sovereignty needs.
Sovereign AI Solutions: Increased demand for region-specific AI models and solutions tailored to local requirements.
AI Infrastructure: Achieved a 50% increase in throughput for OpenAI inferencing and added nearly 1 gigawatt of capacity this quarter.
Custom Silicon Development: Introduced Maia 200 and Cobalt 200 chips, delivering significant performance and cost improvements.
Security Enhancements: Rolled out new security Copilot agents, with 24 billion interactions audited this quarter, up 9x year-over-year.
AI and Agent Platform Expansion: Focused on building a comprehensive agent platform with tools like Foundry and Agent 365, enabling businesses to deploy and manage AI agents effectively.
Healthcare and Science Applications: Expanded AI applications in healthcare with Dragon Copilot and in R&D with Microsoft Discovery for scientific advancements.
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Risk or Challenges
AI Infrastructure Investments: Continued investments in AI infrastructure and growing AI product usage are driving down gross margin percentages, which could impact profitability.
Supply and Demand Imbalance: Customer demand for Azure and AI services continues to exceed available supply, creating challenges in meeting demand and balancing priorities.
Gaming Business Impairments: Impairment charges in the gaming business and underperformance in Xbox content and services revenue could negatively impact the segment's profitability.
Memory Price Increases: Rising memory prices could create volatility in transactional purchasing and impact capital expenditures, potentially affecting gross margins over time.
Execution Challenges in Search and News Advertising: Execution challenges in search and news advertising have led to slightly below expectations in revenue growth, which could impact overall performance.
Regulatory and Sovereignty Concerns: Expanding data center investments in multiple countries to address sovereignty and local data residency needs could increase operational complexity and costs.
AI Talent and R&D Costs: Increased R&D investments in AI talent and compute capacity are driving up operating expenses, which could pressure margins.
Quarterly Variability in Azure Growth: Quarterly variability in Azure growth rates due to timing of capacity delivery and in-period revenue recognition could create unpredictability in financial performance.
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Guidance & Outlook
Microsoft Cloud Revenue: Expected to be $80.65 billion to $81.75 billion in Q3, reflecting growth of 15% to 17%.
Capital Expenditures: Expected to decrease sequentially in Q3 due to variability in cloud infrastructure build-outs and timing of delivery of finance leases. Mix of short-lived assets to remain similar to Q2.
Microsoft Cloud Gross Margin Percentage: Expected to be roughly 65% in Q3, down year-over-year due to continued investments in AI.
Productivity and Business Processes Revenue: Expected to be $34.25 billion to $34.55 billion in Q3, reflecting growth of 14% to 15%.
M365 Commercial Cloud Revenue Growth: Expected to grow between 13% and 14% in constant currency in Q3, driven by Copilot momentum and E5 adoption.
M365 Consumer Cloud Revenue Growth: Expected to grow in the mid- to high 20% range in Q3, driven by ARPU growth and subscription volume.
LinkedIn Revenue Growth: Expected to grow in the low double digits in Q3.
Dynamics 365 Revenue Growth: Expected to grow in the high teens in Q3.
Intelligent Cloud Revenue: Expected to be $34.1 billion to $34.4 billion in Q3, reflecting growth of 27% to 29%.
Azure Revenue Growth: Expected to grow between 37% and 38% in constant currency in Q3.
On-Premises Server Business Revenue: Expected to decline in the low single digits in Q3 as growth rates normalize.
More Personal Computing Revenue: Expected to be $12.3 billion to $12.8 billion in Q3.
Windows OEM Revenue: Expected to decline roughly 10% in Q3.
Search and News Advertising Revenue ex TAC: Expected to grow in the high single digits in Q3.
Xbox Content and Services Revenue: Expected to decline in the mid-single digits in Q3.
Hardware Revenue: Expected to decline year-over-year in Q3.
FX Impact: Expected to increase Q4 total revenue and COGS growth by less than 1 point, with no impact to operating expense growth.
FY '26 Operating Margins: Expected to be up slightly due to prioritization of investment in key growth areas and favorable impact from higher mix of revenue in Windows OEM and commercial on-prem businesses.
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Shareholder Return Plan
Dividend Payout: We returned $12.7 billion to shareholders through dividend and share repurchases, an increase of 32% year-over-year.
Share Repurchase: We returned $12.7 billion to shareholders through dividend and share repurchases, an increase of 32% year-over-year.
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Key Q&A
Q:How should investors think about the ROI on Microsoft's CapEx investments, particularly in relation to Azure growth?
A:Amy Hood explained that CapEx investments are allocated across various areas, including Azure, M365 Copilot, GitHub Copilot, and R&D. She emphasized that GPUs and CPUs are used to meet increasing demand and support innovation. Satya Nadella added that the focus is on optimizing long-term value across the portfolio, not just Azure.
Q:How can investors get comfortable with the revenue and margin potential of AI-centric hardware investments over their useful life?
A:Amy Hood stated that much of the AI-centric hardware, such as GPUs, is already contracted for most of its useful life, reducing risk. She also noted that efficiency and margins improve over time as the hardware ages. Satya Nadella added that software optimization extends the useful life of hardware, further enhancing value.
Q:What is Microsoft's perspective on the durability of its OpenAI-related backlog?
A:Amy Hood highlighted that 55% of the backlog is diversified across Microsoft's portfolio, with 45% related to OpenAI. She expressed confidence in the partnership with OpenAI and emphasized the breadth and growth of the overall portfolio.
Q:Can you comment on the magnitude of capacity additions and their allocation?
A:Amy Hood mentioned that capacity is being added globally as quickly as possible, including in the U.S. and other regions. She noted that specific sites like Atlanta and Wisconsin are part of multiyear projects and emphasized the importance of global capacity expansion to meet demand.
Q:What is the significance of the Maia 200 accelerator for inference, and how does it impact Microsoft's silicon strategy?
A:Satya Nadella explained that Maia 200 demonstrates Microsoft's ability to innovate in silicon and systems for AI workloads. He emphasized the importance of maintaining flexibility and partnerships with other silicon providers like NVIDIA and AMD to optimize total cost of ownership (TCO).
Q:What is the momentum in enterprises adopting Microsoft's AI stack, and how does it impact their spending?
A:Satya Nadella noted strong adoption across M365, security, and GitHub, with compounding benefits for customers. He highlighted transformative effects like Work IQ and agent systems, which enhance enterprise efficiency and drive spending on Microsoft's AI stack.
Q:What trends are you seeing in cloud migrations and their relation to AI workloads?
A:Satya Nadella stated that cloud migrations are ongoing, with SQL Server as an example of growth in Azure. He explained that AI workloads require a mix of compute and storage, emphasizing the need for balanced infrastructure to support both traditional and AI-driven workloads.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing specific concerns about the ROI of CapEx investments and the durability of OpenAI-related backlog. Responses often included broad statements about long-term value and diversification without providing detailed metrics or timelines.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Agent
CLI
Foundry
GDP
MCP
Maia
Microsoft seat
NVIDIA
Security
TCO
University
Work IQ
agent OpenAI
agent control
agent platform
approach
apps
cloud factory
communication
context engineering
design
domain
firm
form factor
franchise
game changer
generation hardware
integration
knowledge agent
latency
momentum
need
precision
qualification
run
security agent
streaming
tune
value experience
workflow
MSFT Transcript
Microsoft Corporation (MSFT) Q2 2026 Earnings Call Transcript
Positive1-28
The earnings report reveals strong financial performance with significant revenue and EPS growth, driven by demand across various segments. Despite a decline in free cash flow, commercial bookings surged, indicating robust future growth. The Q&A highlighted confidence in CapEx investments and AI-centric hardware, though some concerns about ROI and backlog durability were not fully addressed. Overall, the positive financial metrics and optimistic guidance, especially in AI and cloud services, suggest a likely stock price increase, despite some investor concerns.
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Positive10-29
The earnings call reveals strong financial performance with significant growth in free cash flow, commercial bookings, and cloud services revenue. Despite a decline in gaming revenue and cloud gross margin, the company maintains optimistic guidance for FY '26 with a focus on AI and cloud. The Q&A session addressed concerns about risks and investments, with management expressing confidence in their strategic positioning. The positive aspects, such as AI-driven growth and strategic partnerships, outweigh the negatives, suggesting a positive stock price movement.
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