EARNINGS REVIEW
Microsoft, FY26 Q1 Earnings Results
Historical quarterly report · Results and outlook reflect information available at the time of that release. Actual results from subsequent quarters are not incorporated into the outlook.
Growth in Azure and productivity services increased operating income. Separate OpenAI investment losses from the timing differences in cash payments for capital expenditure that includes leases.
Assessment · Cloud demand and operating income growth are positive. High FCF does not mean investment is small. Assess future payment obligations for equipment acquired through finance leases alongside profitability after capacity expansion.
Key management and company statements
Earnings release · Short original excerpt“We delivered a strong start to the fiscal year, exceeding expectations across revenue, operating income, and earnings per share.”Meaning · The fiscal year began strongly, with revenue, operating income and earnings per share exceeding expectations.
Context · This is a CFO statement in the earnings release.
Original statement ↗01 Revenue, operating income and results versus expectations
Year over year · Revenue 65.585 → 77.673 B$ (+18.4% · +12.088 B$), Operating income 30.552 → 37.961 B$ (+24.3% · +7.409 B$).
Quarter over quarter · Revenue 76.441 → 77.673 B$ (+1.6% · +1.232 B$), Operating income 34.323 → 37.961 B$ (+10.6% · +3.638 B$), Operating margin 44.9% → 48.9% (+4.0%p).
Azure and other cloud revenue increased 40% year over year, or 39% in constant currency. Intelligent Cloud and the productivity segment drove consolidated growth.
02 Earnings sustainability · From operating income to net income
OpenAI investment losses reduced after-tax net income by 3.086 B$. Interpret operating income of 37.961 B$ separately from net income of 27.747 B$ after investment gains and losses.
- Operating income
- 37.961 B$
- Net non-operating income/loss
- −3.660 B$
- Income tax expense
- −6.554 B$
- Consolidated net income
- 27.747 B$
Net income of 27.747 B$ in the existing quarterly data is on a consolidated basis.
03 Cash flow quality · Net income → OCF → FCF
The official earnings call described total CapEx of 34.900 B$, finance leases of 11.100 B$ and cash payments for property and equipment of approximately 19.400 B$. FCF below is based on cash payments and therefore differs from total investment commitments.
- Consolidated net income
- 27.747 B$
- Total net adjustments, including non-cash items and working capital¹
- 17.310 B$
- Operating cash flow
- 45.057 B$
- Cash CapEx
- −19.394 B$
- FCF
- 25.663 B$
¹ Total net adjustments calculated as OCF minus net income. This is not a single disclosed line item; it combines non-cash items, working capital, classification differences and other adjustments.
FCF versus the previous quarter · 25.568 → 25.663 B$, a 0.095 B$ improvement.
04 Financial capacity · Net debt and payment obligations
Previous-quarter net cash · 2025-06-30
Cash and liquid assets 94.565 / Borrowings 43.151 B$
Current-quarter net cash · 2025-09-30
Cash and liquid assets 102.012 / Borrowings 43.208 B$
Net debt improved by 7.390 B$ from the previous quarter. The carrying amount of current borrowings is 7.832 B$. This may differ from the principal maturity schedule.
The company returned approximately 10.700 B$ through dividends and share repurchases during the quarter. Borrowings in the net cash table do not separately include data center finance lease liabilities.
Common definitions · Cash and liquid assets = cash equivalents + current investments and deposits. Borrowings = carrying amount of interest-bearing debt (current + non-current), excluding separate lease liabilities. This differs from total liabilities of 273.275 B$. Restricted cash, non-current securities and non-current deposits are excluded from cash and liquid assets.
05 Investment, capital allocation and cash recovery
Approximately half of investment was described as relatively short-lived assets such as GPUs and CPUs, with the remainder in long-term infrastructure. Distinguish the investment payback period from an asset's useful life.
This quarter, cash CapEx/revenue was 25.0% and FCF/revenue was 33.0%. These ratios should not be used as a simple ranking of companies with different business models and FCF definitions.
06 Next-quarter and full-year outlook and implications
YoY +14.2%~+15.8% · QoQ +2.4%~+3.8%. Comparison revenue was 69.632 B$ in the corresponding prior-year quarter and 77.673 B$ in the current quarter. Growth rates were calculated from the underlying amounts.
The company expected FY2026 CapEx growth to exceed FY2025. The additional OpenAI agreement announced in October reflects information at that announcement date and is not conflated with September-end RPO.
RPO / Backlog
QoQ 375.000 → 398.000 B$ (+6.1% · +23.000 B$).
YoY 266.000 → 398.000 B$ (+49.6% · +132.000 B$).
Total RPO. Commercial RPO is a separate metric and is not an Azure-only order backlog · Contract balances are not equivalent to committed next-quarter revenue or cash inflows. RPO scope differs across companies.
RPO disclosure ↗Quarterly results · CY-aligned view
Amounts in B$. The table shows all 4 quarters of the prior year and the current year's reported quarters, based on the report's CY-aligned year. Each fiscal quarter is assigned to the calendar quarter with the greatest overlap in its actual reporting period; the original FY/CY label and start and end dates are also shown. Amounts have not been recalculated into actual calendar quarters.
| CY alignment | 2024 · 4 quarters | 2025 · 3 quarters | Change this quarter | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Metric | 2024 total4-quarter totalBalances are at period end | 1QFY24 Q324-01-01 ~24-03-31 | 2QFY24 Q424-04-01 ~24-06-30 | 3QFY25 Q124-07-01 ~24-09-30 | 4QFY25 Q224-10-01 ~24-12-31 | 2025 YTD3-quarter totalBalances are at period end | 1QFY25 Q325-01-01 ~25-03-31 | 2QFY25 Q425-04-01 ~25-06-30 | 3QFY26 Q125-07-01 ~25-09-30 | QoQvs FY25 Q4 | YoYvs FY25 Q1 |
| Revenue | 261.802 | 61.858 | 64.727 | 65.585 | 69.632 | 224.180 | 70.066 | 76.441 | 77.673 | +1.6%+1.232 B$ | +18.4%+12.088 B$ |
| Operating income | 117.711 | 27.581 | 27.925 | 30.552 | 31.653 | 104.284 | 32.000 | 34.323 | 37.961 | +10.6%+3.638 B$ | +24.3%+7.409 B$ |
| Operating margin | 45.0% | 44.6% | 43.1% | 46.6% | 45.5% | 46.5% | 45.7% | 44.9% | 48.9% | +4.0%p | +2.3%p |
| FCF | 70.031 | 20.965 | 23.322 | 19.257 | 6.487 | 71.530 | 20.299 | 25.568 | 25.663 | +0.095 B$ | +6.406 B$ |
| Operating cash flow | 125.583 | 31.917 | 37.195 | 34.180 | 22.291 | 124.748 | 37.044 | 42.647 | 45.057 | +5.7%+2.410 B$ | +31.8%+10.877 B$ |
| Cash CapEx | 55.552 | 10.952 | 13.873 | 14.923 | 15.804 | 53.218 | 16.745 | 17.079 | 19.394 | +13.6%+2.315 B$ | +30.0%+4.471 B$ |
| Net cash | 26.585 | 14.579 | 23.913 | 33.311 | 26.585 | 58.804 | 36.737 | 51.414 | 58.804 | +7.390 B$ | +25.493 B$ |
| Cash and liquid assets | 71.555 | 80.021 | 75.543 | 78.428 | 71.555 | 102.012 | 79.618 | 94.565 | 102.012 | +7.9%+7.447 B$ | +30.1%+23.584 B$ |
| Borrowings | 44.970 | 65.442 | 51.630 | 45.117 | 44.970 | 43.208 | 42.881 | 43.151 | 43.208 | +0.1%+0.057 B$ | −4.2%−1.909 B$ |
Indented rows are components of, or reference items for, the parent metric. Net cash = cash and liquid assets − borrowings. Depending on company definitions, FCF may include additional adjustments such as lease principal and therefore differ from operating cash flow − cash CapEx. See the cash flow discussion for the detailed definition.
Annual totals and year-to-date totals precede the quarters for each year. Revenue, earnings and cash flow are sums of quarterly values; operating margin equals total operating income divided by total revenue; net cash, cash and borrowings are the final quarter's ending balances. Do not make a simple annual comparison of totals covering different period lengths.
Net cash = cash and liquid assets − borrowings. A negative value indicates net debt. Changes in FCF and net cash are shown as absolute amounts in B$. Quarterly values were not adjusted to match disclosed annual totals.
Comparison bases, calculations and quarterly sources
Calculations and presentation · Amounts in B$. US disclosures in millions of dollars were preserved by dividing by 1,000. Where only cumulative cash flow was available, the preceding cumulative amount in the same fiscal year was subtracted. YoY, QoQ and margins were calculated before display rounding. Earnings growth from negative or 0 bases is shown as a sign change and/or absolute amount.
Opinions and outlook · Management quotations include short original excerpts and translations. Unless identified as earnings call transcripts, quotations come from earnings releases. Interpretations and implications are the author's judgments. No numerically unverified probabilities of achieving targets are assigned.