Microsoft delivered another solid quarter, with double-digit gains across both top and bottom lines. Most notably, the company is evolving its business model from a traditional seat-based licensing structure to a license-plus-consumption framework to better monetise the rise of agentic AI.
| Financial indicator | Q3 2025 (US$ million) | Q3 2026 (US$ million) | Percentage change |
| Revenue | 70,066 | 82,886 | +18.3% |
| Productivity and Business Processes | 29,944 | 35,013 | +16.9% |
| Intelligent Cloud | 26,751 | 34,681 | +29.6% |
| More Personal Computing | 13,371 | 13,192 | -1.3% |
| Operating income | 32,000 | 38,398 | +20.0% |
| Net income | 25,824 | 31,778 | +23.1% |
Revenue from AI business surged 123% year-on-year, with an annual run rate of US$37 billion. Overall operating margin improved from 45.7% in Q3 2025 to 46.3% in Q3 2026, driven by ongoing operational improvements across Azure and M365 Commercial cloud and a favourable shift toward higher-margin businesses. These gains were partially offset by continued investments in AI and talent as well as increased Copilot usage, alongside an impairment charge in the gaming segment and a low prior-year expense comparable.
Capital expenditures (CapEx) declined from US$37.5 billion to US$31.9 billion quarter-on-quarter. This decline is due to the timing: it fluctuates based on when a data centre is constructed and when leased AI hardware is delivered and installed. Roughly two-thirds was spent on short-lived assets, primarily GPUs and CPUs, while the remainder went toward long-lived assets with a lifespan exceeding 15 years. The company returned US$10.2 billion to shareholders in the form of dividend payments and share repurchases.
Total commercial remaining performance obligation surged 99% to US$627 billion due to large OpenAI commitments. Excluding this, growth would have grown 26%. About 25% of this backlog will be recognised as revenue within the next 12 months (up 39% year-on-year), while the long-term portion grew 138%. The weighted average contract duration stood at 2.5 years.
Total bookings fell 4% year-on-year due to a difficult comparison against a massive OpenAI commitment in the prior period. However, excluding OpenAI, core commercial bookings grew 7%, signalling steady demand across the broader enterprise customer base.
An important shift is occurring in the business model as Microsoft transitions toward a license-plus-consumption framework to align revenue directly with AI compute costs. Nearly 60% of service customers have already moved to usage-based credits, and GitHub is similarly pivoting to a consumption model in June 2026 after enterprise subscribers nearly tripled year-on-year during the quarter. This transition ensures that revenue scales alongside actual usage intensity rather than being limited to fixed seat counts. There may be some volatility in traditional booking metrics as usage-based billing replaces upfront multi-year commitments.
Microsoft added one gigawatt of capacity this quarter alone while remaining on track to double its global data centre footprint within the next two years. This expansion is bolstered by a 20% reduction in GPU deployment times and the early launch of the Fairwater data centre. Custom silicon—including Maia 200 AI accelerator and Cobalt CPUs that support almost half of data centre regions—is driving better performance-per-dollar and protecting margins as AI scales.
Revenue is expected to grow between 13% and 15% to between US$86.7 billion and US$87.8 billion, driven by strong commercial growth, which was partially mitigated by softer consumer performance. CapEx is expected to exceed US$40 billion in Q4 2026 and reach US$190 billion in 2026 driven by rising memory costs and the timing of finance leases amid ongoing supply constrains throughout 2026. Both revenue and operating income are anticipated to record double-digit growth in 2027.
Productivity and Business Processes
M365 commercial cloud revenue grew 19%, outstripping the 6% increase in the number of paid seats (primarily among SMEs and frontline workers). Revenue momentum was primarily driven by M365 Copilot, which surged 250% year-on-year to surpass 20 million paid seats this quarter. Both E5 and M365 Copilot continued to contribute to growth in average revenue per user (ARPU) growth.
Copilot’s underlying reasoning engine Work IQ now handles 35% more data year-on-year (17+ exabytes). This creates a flywheel effect where every AI conversation and document created feeds back into the system, making the AI’s context increasingly accurate and rich over time.
Engagement is deepening as weekly Copilot usage now mirrors that of Outlook, and the number of customers with over 50,000 seats quadrupled year-on-year. Further, 90% of the Fortune 500 are now utilising Microsoft’s tools to build autonomous agents, and first-party agent usage has grown sixfold since the start of 2026.
- The marginal growth in M365 commercial products revenue was due to the continued normalisation of Office 2024 traditional one-off purchasing trends.
- The growth in M365 consumer cloud revenue was driven by growth in both ARPU and subscriptions. The number of Microsoft 365 consumer users grew to nearly 95 million.
- LinkedIn remains an important sales and advertising channel for businesses. Its members reached 1.3 billion while its revenue growth was driven by all business lines. The networking platform’s new agentic products—which automate candidate sourcing and screening—have already reached a US$450 million annualised revenue run rate.
Dynamics 365 continues to report market share gains and revenue growth across all workloads. Bookings growth slowed because customers are reviewing their budgets amid the shift from traditional seat-based licensing structure to a hybrid model of fewer base seats paired with pay-as-you-go AI consumption.
Segmental revenue in Q4 2026 is expected to range between US$37.0 billion and $37.3 billion, with a year-on-year growth of between 12% and 13%.
Intelligent Cloud
Intelligent Cloud was the fastest-growing segment. Within the segment, revenue growth from Azure and other cloud services accelerated to about 40% during the quarter. Despite adding 1GW of power capacity this quarter, customer demand for both AI and non-AI services continues to outstrip available supply. Revenue from on-premises server business recorded marginal growth amid customers’ ongoing migration to the cloud.
Microsoft Cloud revenue grew 29% year-on-year to US$54.5 billion, driven by robust Azure demand as well as proprietary AI apps and services. Microsoft Cloud gross margin dropped from 69% in Q3 2025 to 66% in Q3 2026 owing to the reasons mentioned. The gross margin is expected to compress to 64% in the next quarter, owing to continued AI investment and high compute costs from tools like GitHub Copilot.
The segmental revenue is expected to grow between 27% and 28% to between US$38.0 billion and $38.3 billion. Microsoft expects Azure growth to accelerate beyond the current 39% to 40% guidance in the second half of the calendar year as new capacity becomes available.
More Personal Computing
The number of monthly active Windows devices exceeded 1.6 billion. Microsoft’s browser Edge continued to record market share gains for 20 quarters consecutively. The number of monthly active users on Bing surpassed 1 billion. The low-teens increase in search advertising revenue excluding traffic acquisition costs was due to higher volume and revenue per search across Edge and Bing.
The decline in gaming revenue was attributable to lower Xbox content and services revenue given a tough comparison against strong first-party content performance in Q3 2025. Nevertheless, the number of monthly Xbox active users game streaming hours reached record highs during the quarter.
Despite the overall decline in revenue from Windows OEM and devices, WindowsOEM performed well. This is on the back of channel partners aggressively building inventory in anticipation of rising memory costs.
The segmental revenue is forecast to hover between US$11.8 billion to US$12.3 billion.
Key analyst questions
Management is aggressively scaling CapEx to meet accelerating demand, focusing on short-term compute assets that correlate directly to immediate revenue. A significant growth inflection is anticipated in the first half of FY2027 as more data centres are delivered and new capacity comes online. Notably, AI margins are currently higher than those seen during the initial cloud transition, supported by software efficiencies and the integration of first-party hardware.
The partnership with OpenAI provides Microsoft with royalty-free access to frontier model IP through 2032, ensuring a stable foundation for long-term product development. The revenue-sharing agreement with OpenAI is active until 2030, while OpenAI remains a major customer for Microsoft’s high-margin compute infrastructure.
The fifth perspective
Microsoft is transitioning from a traditional seat-based license model to a hybrid license-plus-consumption framework. This evolution is fuelled by the rise of agentic AI, which expands the total addressable market by capturing a larger share of high-value digital labour.
