EARNINGS REVIEW
Microsoft, FY26 Q2 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.
Cloud growth continued, but increased cash capital expenditure reduced FCF from the previous quarter. Consider OpenAI investment gains alongside customer concentration in RPO.
Assessment · Demand and operating performance are growing, but cash generation has not increased as sharply as net income. Given the long duration of RPO, its concentration in OpenAI and the burden of cash investment, the speed of converting contracts into cash is a key condition to monitor.
Key management and company statements
Earnings release · Short original excerpt“Microsoft Cloud revenue crossed $50 billion this quarter”Meaning · Microsoft Cloud revenue exceeded 50 B$ this quarter.
Context · This statement comes from the earnings release; actual Cloud revenue was approximately 51.5 B$.
Original statement ↗01 Revenue, operating income and results versus expectations
Year over year · Revenue 69.632 → 81.273 B$ (+16.7% · +11.641 B$), Operating income 31.653 → 38.275 B$ (+20.9% · +6.622 B$).
Quarter over quarter · Revenue 77.673 → 81.273 B$ (+4.6% · +3.600 B$), Operating income 37.961 → 38.275 B$ (+0.8% · +0.314 B$), Operating margin 48.9% → 47.1% (−1.8%p).
Azure and other cloud revenue grew 39% year over year, or 38% in constant currency. More Personal Computing declined year over year, showing that cloud and productivity businesses were the center of growth.
Results versus previous guidance
Revenue guidance 79.500~80.600 B$ → actual 81.273 B$. 0.673 B$ above the high end.
02 Earnings sustainability · From operating income to net income
The net income impact of OpenAI investments was +7.583 B$. Company-reported non-GAAP net income excluding that effect was 30.875 B$, distinct from GAAP net income of 38.458 B$.
- Operating income
- 38.275 B$
- Net non-operating income/loss
- 9.971 B$
- Income tax expense
- −9.788 B$
- Consolidated net income
- 38.458 B$
Net income of 38.458 B$ in the existing quarterly data is on a consolidated basis.
03 Cash flow quality · Net income → OCF → FCF
Of total CapEx of approximately 37.500 B$, finance leases were approximately 6.700 B$ and cash payments for property and equipment approximately 29.900 B$. The company said the higher cash payment share contributed to the sequential decline in FCF.
- Consolidated net income
- 38.458 B$
- Total net adjustments, including non-cash items and working capital¹
- −2.700 B$
- Operating cash flow
- 35.758 B$
- Cash CapEx
- −29.876 B$
- FCF
- 5.882 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 · 25.663 → 5.882 B$, a 19.781 B$ deterioration.
04 Financial capacity · Net debt and payment obligations
Previous-quarter net cash · 2025-09-30
Cash and liquid assets 102.012 / Borrowings 43.208 B$
Current-quarter net cash · 2025-12-31
Cash and liquid assets 89.462 / Borrowings 40.262 B$
Net debt deteriorated by 9.604 B$ from the previous quarter. The carrying amount of current borrowings is 4.837 B$. This may differ from the principal maturity schedule.
The company paid approximately 12.700 B$ in dividends and share repurchases during the quarter. Contract balances represent future earnings opportunities, not current cash or immediately available liquidity.
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 274.427 B$. Restricted cash, non-current securities and non-current deposits are excluded from cash and liquid assets.
05 Investment, capital allocation and cash recovery
The company said approximately two-thirds of CapEx comprised short-lived assets such as GPUs and CPUs. Rapid replacement cycles for AI assets and supply constraints should be reflected in investment return assessments.
This quarter, cash CapEx/revenue was 36.8% and FCF/revenue was 7.2%. These ratios should not be used as a simple ranking of companies with different business models and FCF definitions.
06 Next-quarter and full-year outlook and implications
YoY +15.1%~+16.7% · QoQ −0.8%~+0.6%. Comparison revenue was 70.066 B$ in the corresponding prior-year quarter and 81.273 B$ in the current quarter. Growth rates were calculated from the underlying amounts.
The outlook incorporates both growth in commercial businesses and weakness in some consumer businesses. Excess demand alone does not establish the timing of equipment supply and revenue recognition.
RPO / Backlog
QoQ 398.000 → 631.000 B$ (+58.5% · +233.000 B$).
YoY 304.000 → 631.000 B$ (+107.6% · +327.000 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 · 4 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 total4-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 | 4QFY26 Q225-10-01 ~25-12-31 | QoQvs FY26 Q1 | YoYvs FY25 Q2 |
| Revenue | 261.802 | 61.858 | 64.727 | 65.585 | 69.632 | 305.453 | 70.066 | 76.441 | 77.673 | 81.273 | +4.6%+3.600 B$ | +16.7%+11.641 B$ |
| Operating income | 117.711 | 27.581 | 27.925 | 30.552 | 31.653 | 142.559 | 32.000 | 34.323 | 37.961 | 38.275 | +0.8%+0.314 B$ | +20.9%+6.622 B$ |
| Operating margin | 45.0% | 44.6% | 43.1% | 46.6% | 45.5% | 46.7% | 45.7% | 44.9% | 48.9% | 47.1% | −1.8%p | +1.6%p |
| FCF | 70.031 | 20.965 | 23.322 | 19.257 | 6.487 | 77.412 | 20.299 | 25.568 | 25.663 | 5.882 | −19.781 B$ | −0.605 B$ |
| Operating cash flow | 125.583 | 31.917 | 37.195 | 34.180 | 22.291 | 160.506 | 37.044 | 42.647 | 45.057 | 35.758 | −20.6%−9.299 B$ | +60.4%+13.467 B$ |
| Cash CapEx | 55.552 | 10.952 | 13.873 | 14.923 | 15.804 | 83.094 | 16.745 | 17.079 | 19.394 | 29.876 | +54.0%+10.482 B$ | +89.0%+14.072 B$ |
| Net cash | 26.585 | 14.579 | 23.913 | 33.311 | 26.585 | 49.200 | 36.737 | 51.414 | 58.804 | 49.200 | −9.604 B$ | +22.615 B$ |
| Cash and liquid assets | 71.555 | 80.021 | 75.543 | 78.428 | 71.555 | 89.462 | 79.618 | 94.565 | 102.012 | 89.462 | −12.3%−12.550 B$ | +25.0%+17.907 B$ |
| Borrowings | 44.970 | 65.442 | 51.630 | 45.117 | 44.970 | 40.262 | 42.881 | 43.151 | 43.208 | 40.262 | −6.8%−2.946 B$ | −10.5%−4.708 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.