EARNINGS REVIEW
Microsoft, FY26 Q3 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.
Azure and Microsoft 365 growth increased revenue and operating income, and quarterly FCF was positive. However, capital investment to meet AI demand is expected to rise further, making the timing gaps between orders, revenue and investment spending important.
Assessment · Cloud and AI monetization are progressing positively, and current cash generation is evident. However, greater investment from next quarter onward may pressure FCF. The key is the pace at which rising contract balances become actual revenue and collected cash.
Key management and company statements
Earnings release · Short original excerpt“Our AI business surpassed an annual revenue run rate of $37 billion”Meaning · The AI business's annualized revenue run rate exceeded 37 B$.
Context · This does not mean actual full-year revenue or revenue of 37 B$ in that quarter.
Original statement ↗01 Revenue, operating income and results versus expectations
Year over year · Revenue 70.066 → 82.886 B$ (+18.3% · +12.820 B$), Operating income 32.000 → 38.398 B$ (+20.0% · +6.398 B$).
Quarter over quarter · Revenue 81.273 → 82.886 B$ (+2.0% · +1.613 B$), Operating income 38.275 → 38.398 B$ (+0.3% · +0.123 B$), Operating margin 47.1% → 46.3% (−0.8%p).
Azure and other cloud services revenue grew 40%, or 39% in constant currency. Microsoft Cloud revenue rose 29% to approximately 54.5 B$. This is a company metric covering multiple products, not a separate reporting segment, and is not added to the segment revenue above.
Results versus previous guidance
Revenue guidance 80.650~81.750 B$ → actual 82.886 B$. 1.136 B$ above the high end.
02 Earnings sustainability · From operating income to net income
The net loss related to OpenAI investments was 0.014 B$, leaving a small gap between adjusted net income of 31.792 B$ and GAAP net income of 31.778 B$. This quarter's earnings growth did not depend on a large OpenAI valuation gain.
- Operating income
- 38.398 B$
- Net non-operating income/loss
- 0.942 B$
- Income tax expense
- −7.562 B$
- Consolidated net income
- 31.778 B$
Net income of 31.778 B$ in the existing quarterly data is on a consolidated basis.
03 Cash flow quality · Net income → OCF → FCF
FCF of 15.803 B$ was calculated by subtracting cash PP&E spending of 30.876 B$ from OCF of 46.679 B$. CapEx of approximately 31.9 B$ cited on the earnings call includes acquisitions through finance leases and other acquisition-based measures, so it differs from cash spending.
Finance lease acquisitions this quarter were approximately 4.7 B$. Because equipment receipt and cash settlement occur at different times, this amount is not simply added to cash PP&E to reconstruct company CapEx.
- Consolidated net income
- 31.778 B$
- Total net adjustments, including non-cash items and working capital¹
- 14.901 B$
- Operating cash flow
- 46.679 B$
- Cash CapEx
- −30.876 B$
- FCF
- 15.803 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 · 5.882 → 15.803 B$, a 9.921 B$ improvement.
04 Financial capacity · Net debt and payment obligations
Previous-quarter net cash · 2025-12-31
Cash and liquid assets 89.462 / Borrowings 40.262 B$
Current-quarter net cash · 2026-03-31
Cash and liquid assets 78.272 / Borrowings 40.262 B$
Net debt deteriorated by 11.190 B$ from the previous quarter. The carrying amount of current borrowings is 8.839 B$. This may differ from the principal maturity schedule.
Commercial RPO indicates a revenue base from long-term contracts, but the full amount is not cash to be collected in the near term. Lease payment obligations also exist, so assess net cash balances alongside future investment plans.
Disclosed total RPO of 633 B$ differs in scope from Commercial RPO of 627 B$. It is not labeled as Azure-only backlog, and the table below uses total RPO from the existing common dataset.
Common definitions · Cash and liquid assets = cash equivalents + current investments and deposits. Borrowings = carrying amount of interest-bearing debt (current + non-current), excluding separate lease liabilities. This differs from total liabilities of 279.861 B$. 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 projected CY2026 CapEx of approximately 190 B$, including an approximately 25 B$ impact from higher component prices. Q4 CapEx was projected to exceed 40 B$. This is not relabeled as a forecast of cash spending alone.
This quarter, cash CapEx/revenue was 37.3% and FCF/revenue was 19.1%. These ratios should not be used as a simple ranking of companies with different business models and FCF definitions.
06 Next-quarter and full-year outlook and implications
YoY +13.4%~+14.9% · QoQ +4.6%~+5.9%. Comparison revenue was 76.441 B$ in the corresponding prior-year quarter and 82.886 B$ in the current quarter. Growth rates were calculated from the underlying amounts.
The Q4 outlook includes approximately 0.9 B$ in one-time costs for a voluntary retirement program. The annual FY2026 operating margin was expected to be approximately 1%p above the prior year. As the company expands capacity to meet demand, both revenue conversion and investment efficiency should be tracked.
RPO / Backlog
QoQ 631.000 → 633.000 B$ (+0.3% · +2.000 B$).
YoY 321.000 → 633.000 B$ (+97.2% · +312.000 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 | 2025 · 4 quarters | 2026 · 1 quarter | Change this quarter | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Metric | 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 | 2026 YTD1-quarter totalBalances are at period end | 1QFY26 Q326-01-01 ~26-03-31 | QoQvs FY26 Q2 | YoYvs FY25 Q3 |
| Revenue | 305.453 | 70.066 | 76.441 | 77.673 | 81.273 | 82.886 | 82.886 | +2.0%+1.613 B$ | +18.3%+12.820 B$ |
| Operating income | 142.559 | 32.000 | 34.323 | 37.961 | 38.275 | 38.398 | 38.398 | +0.3%+0.123 B$ | +20.0%+6.398 B$ |
| Operating margin | 46.7% | 45.7% | 44.9% | 48.9% | 47.1% | 46.3% | 46.3% | −0.8%p | +0.7%p |
| FCF | 77.412 | 20.299 | 25.568 | 25.663 | 5.882 | 15.803 | 15.803 | +9.921 B$ | −4.496 B$ |
| Operating cash flow | 160.506 | 37.044 | 42.647 | 45.057 | 35.758 | 46.679 | 46.679 | +30.5%+10.921 B$ | +26.0%+9.635 B$ |
| Cash CapEx | 83.094 | 16.745 | 17.079 | 19.394 | 29.876 | 30.876 | 30.876 | +3.3%+1.000 B$ | +84.4%+14.131 B$ |
| Net cash | 49.200 | 36.737 | 51.414 | 58.804 | 49.200 | 38.010 | 38.010 | −11.190 B$ | +1.273 B$ |
| Cash and liquid assets | 89.462 | 79.618 | 94.565 | 102.012 | 89.462 | 78.272 | 78.272 | −12.5%−11.190 B$ | −1.7%−1.346 B$ |
| Borrowings | 40.262 | 42.881 | 43.151 | 43.208 | 40.262 | 40.262 | 40.262 | 0.0%0.000 B$ | −6.1%−2.619 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.