In the first quarter of financial year 2026, accelerating demand and adoption of Microsoft’s AI platform and family of Copilots continued to fuel significant investments in both infrastructure and talent. The Intelligent Cloud segment, led by Azure, remained the company’s primary growth engine, as demand for AI and cloud services surged across industries.
| Financial indicators | Q1 2025 (US$ million) | Q1 2026 (US$ million) | Percentage change |
| Revenue | 65,585 | 77,673 | +18.4% |
| Productivity and Business Processes | 28,317 | 33,020 | +16.6% |
| Intelligent Cloud | 24,092 | 30,897 | +28.2% |
| More Personal Computing | 13,176 | 13,756 | +4.4% |
| Operating income | 30,552 | 37,961 | +24.3% |
| Net income | 24,667 | 27,747 | +12.5% |
Microsoft recorded double-digit revenue growth, driven by robust growth across two segments, namely Productivity and Business Processes and Intelligent Cloud. Overall gross margin dropped from 69.4% in Q1 2025 to 69.0% in Q1 2026, due to AI investments partially offset by efficiency gains across investments in Azure and Microsoft 365 commercial cloud. Operating margins increased from 46.6% to 48.9% over the same period.
Capital expenditures (CapEx) in Q1 2026 totalled US$34.9 billion amid robust demand for its AI and cloud offerings. Approximately 900 million users adopt its AI features company-wide. Microsoft’s CapEx during the quarter was approximately equally split between short-lived assets (GPUs, CPUs, etc.) and long-lived assets (data centres with useful life beyond 15 years). The company invests in new hyperscale data centres such as Fairwater in Wisconsin and deploys next-generation NVIDIA GB300 clusters, to support accelerating Azure AI demand.
Capacity constraints are expected to persist through 2026, but Microsoft plans to increase total AI capacity by more than 80% this year and double its data centre footprint over the next two years.
During the quarter, the company incurred US$10.7 billion across dividend payments and share repurchases.
Revenue in the upcoming quarter is expected to grow between 14% and 16% to between US$79.5 billion and US$80.6 billion, driven by 2% foreign exchange tailwind.
Productivity and Business Processes
Microsoft 365 commercial cloud revenue grew 17% year-on-year, driven by average revenue per user and seat growth, led by E5 and Microsoft 365 Copilot as well as higher Office 2024 transactional purchases. Paid seats increased 6%, primarily among small and medium businesses and frontline workers. Consumer cloud revenue rose 26% year-on-year, with subscriptions exceeding 90 million. LinkedIn revenue grew 10%, driven by marketing solutions, while talent solutions were impacted by a weak hiring market. The professional networking platform now has close to 1.3 billion members. Dynamics 365 revenue increased 18%, with continued share gains.
Copilot adoption continues to accelerate, with over 150 million monthly active users across first-party copilots. Microsoft is bundling Copilot into a new consumer-tier Microsoft 365 Premium subscription. Enterprise adoption is strong, with over 90% of the Fortune 500 using Microsoft 365 Copilot, including PwC and Lloyds Banking Group, which report productivity gains.
GitHub Copilot remains the leading AI coding assistant, with 26 million users and growing enterprise adoption, highlighting its central role in software development.
Intelligent Cloud
Intelligent Cloud revenue grew strongly, driven by Azure demand and core infrastructure growth. Commercial bookings excluding the US$250 billion OpenAI deal rose 112% year-on-year, supported by Azure commitments and large enterprise contracts. Remaining performance obligations rose 51% year-on-year to US$392 billion, nearly doubling over two years. The weighted average duration of two years reflects strong near-term customer commitments.
Azure continues to gain market shares. Its broad adoption across industries mitigates concentration risk and improves asset utilisation. Capacity constraints persist despite continuous efforts to bring more capacity online but Microsoft expects growth in 2026 to further increase year-on-year, with Azure revenue projected to grow about 37% year-on-year in Q2.
On-premises server revenue grew 1%, driven by Windows Server 2025 transactional purchases, even as cloud migrations continue.
More Personal Computing
Segment gross margin improved from 53.0% in Q1 2025 to 56.3% in Q1 2026, driven by favourable mix shift toward more profitable businesses. Windows OEM and devices revenue rose partly because PC makers bought Windows licenses ahead of Windows 10 end of support despite already having high inventory. AI is now integrated across all Windows 11 PCs, enhancing the user experience. The hike in search and news advertising revenue benefited from volume growth and ongoing third-party partnerships. Microsoft has had market share gains across Edge (for eighteen consecutive quarters) and Bing.
Gaming revenue decreased 3% amid a difficult prior year comparison and was partially offset by higher Xbox content and services revenue as well as higher Minecraft engagement. Both first- and third-party games were well received.The company continues to focus on selling more high-margin offerings, mainly digital content and services as well as integrate Copilot capabilities into gaming experiences.
Key analyst questions
Microsoft signed a new long-term agreement with OpenAI, expanding its investment about tenfold. OpenAI has committed to using Azure for an additional US$250 billion worth of cloud services. Microsoft will be the only cloud provider allowed to offer and sell OpenAI’s AI models (via their programming interface) until at least 2030. Microsoft also gets to keep the rights to the AI model designs and products until 2032. The new structure, following OpenAI’s conversion to a public benefit corporation, may introduce greater financial volatility going forward. Further, the US$4.1 billion listed under “other income” actually represents Microsoft’s portion of OpenAI’s losses.
CFO Amy Hood reiterated that Microsoft’s infrastructure investments are tightly linked to actual customer demand, with hardware deployed only as contracts commence. She added that ample lead time and a fungible (flexible), shared fleet across first- and third-party workloads help manage risk and ensure efficient capital use.
Amy Hood explained that Microsoft’s current data centre capacity constraints are limiting Azure’s growth. The company is prioritising capacity for high-value areas like Microsoft 365 Copilot, security solutions, and GitHub, as well as for internal AI research and product development that strengthen future products. As a result, Azure’s revenue could have been higher this quarter if not for these supply limits. However, Microsoft views this capacity allocation as a strategic investment — focusing resources on areas that drive long-term growth and product innovation, even if it slightly tempers short-term Azure gains.
Microsoft may have lost a big AI infrastructure deal to AWS, but by choice — preferring to preserve capacity flexibility, margin discipline, and strategic balance across its portfolio rather than overcommit to a single customer.
Management remains disciplined in asset management by matching depreciation with revenue timing to minimise financial risk. CEO Satya Nadella sees AI agent systems like Copilot as expanding revenue opportunities across productivity, coding, and security.
The fifth perspective
Despite analyst concerns over elevated capital expenditures, Microsoft continues to demonstrate strong top-line growth, disciplined investment, and a balanced approach to capacity expansion. The company remains focused on meeting accelerating AI demand while maintaining efficiency as well short- and long-term profitability.
