EARNINGS REVIEW
Microsoft, FY26 Q4 Earnings Results
Growth in cloud revenue and operating income translated into cash generation this quarter. FCF remained positive after investment, but growing future equipment, lease and purchase commitments require assessing current cash generation alongside future payment obligations.
Assessment · The simultaneous increase in core earnings and FCF is positive. However, distinguish commercial RPO of 678 B$ from total-company RPO of 684 B$, and monitor how quickly contract growth turns into actual capacity delivery, revenue and cash.
Key management and company statements
Earnings release · Short original excerpt“every customer can turn tokens into business results”Meaning · Customers can connect token usage with actual business outcomes.
Context · This explanation connects rising AI usage with customers' willingness to pay. Usage itself is not treated as accounting revenue.
Original statement ↗“We delivered a strong quarter to close out the fiscal year”Meaning · The company closed the fiscal year with solid quarterly results.
Context · Alongside growth, assess whether operating income and cash flow improved together.
Original statement ↗01 Revenue, operating income and results versus expectations
Year over year · Revenue 76.441 → 90.007 B$ (+17.7% · +13.566 B$), Operating income 34.323 → 40.603 B$ (+18.3% · +6.280 B$).
Quarter over quarter · Revenue 82.886 → 90.007 B$ (+8.6% · +7.121 B$), Operating income 38.398 → 40.603 B$ (+5.7% · +2.205 B$), Operating margin 46.3% → 45.1% (−1.2%p).
Intelligent Cloud led growth with a year-over-year increase of 9.428 B$. Microsoft Cloud revenue rose 27% to approximately 59.3 B$. Azure revenue exceeding 100 B$ is an FY26 annual figure, while 30 million paid Copilot seats measure usage scale rather than this quarter's revenue.
02 Earnings sustainability · From operating income to net income
Approximately 3.2 B$ of Anthropic-related investment gains were reflected in net income. Do not attribute all net income to cloud operating growth.
The company discussed lower-than-expected voluntary retirement costs and Xbox-related severance and impairment costs. Operating expense drivers and investment asset gains or losses occupy different accounting categories.
Company-adjusted net income of 35.286 B$ excludes the 0.480 B$ impact of OpenAI investments. It does not mean net income excluding every investment valuation gain or one-time item.
- Operating income
- 40.603 B$
- Net non-operating income/loss
- 3.444 B$
- Income tax expense
- −8.281 B$
- Consolidated net income
- 35.766 B$
Net income of 35.766 B$ in the existing quarterly data is on a consolidated basis.
03 Cash flow quality · Net income → OCF → FCF
After cash CapEx of 35.802 B$ from OCF of 55.441 B$, FCF was 19.639 B$. However, newly acquired finance lease assets and unpaid capital investments may differ from cash CapEx.
- Consolidated net income
- 35.766 B$
- Total net adjustments, including non-cash items and working capital¹
- 19.675 B$
- Operating cash flow
- 55.441 B$
- Cash CapEx
- −35.802 B$
- FCF
- 19.639 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 · 15.803 → 19.639 B$, a 3.836 B$ improvement.
04 Financial capacity · Net debt and payment obligations
Previous-quarter net cash · 2026-03-31
Cash and liquid assets 78.272 / Borrowings 40.262 B$
Current-quarter net cash · 2026-06-30
Cash and liquid assets 76.843 / Borrowings 40.294 B$
Net cash decreased by 1.461 B$ from the previous quarter. The carrying amount of current borrowings is 9.227 B$. This may differ from the principal maturity schedule.
Disclosed payments scheduled for FY27 included debt principal of 9.250 B$, interest of 1.405 B$, construction commitments of 29.848 B$, operating and finance leases including interest of 32.411 B$, and purchase commitments of 169.008 B$.
Purchase commitments also include operating costs, and leases and construction may overlap with the annual investment outlook. Do not add all items as new investment costs or add them to current net debt.
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 315.989 B$. Restricted cash, non-current securities and non-current deposits are excluded from cash and liquid assets.
05 Investment, capital allocation and cash recovery
The company described continued expansion of capital investment in AI training and inference infrastructure and capacity to meet customer demand. FY26 share repurchases of 16.7 B$ and declared dividends of 27.0 B$ are also part of capital allocation. Declared dividends may differ from cash payments in the same period.
This quarter, cash CapEx/revenue was 39.8% and FCF/revenue was 21.8%. 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
FY26 ended with this quarter. Therefore, no remaining revenue requirement is calculated against the already completed annual results. The next fiscal year is interpreted as a period of expanding cloud contract conversion into revenue alongside a rising cash burden from capital investment.
RPO / Backlog
QoQ 633.000 → 684.000 B$ (+8.1% · +51.000 B$).
YoY 375.000 → 684.000 B$ (+82.4% · +309.000 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 · 2 quarters | 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 YTD2-quarter totalBalances are at period end | 1QFY26 Q326-01-01 ~26-03-31 | 2QFY26 Q426-04-01 ~26-06-30 | QoQvs FY26 Q3 | YoYvs FY25 Q4 |
| Revenue | 305.453 | 70.066 | 76.441 | 77.673 | 81.273 | 172.893 | 82.886 | 90.007 | +8.6%+7.121 B$ | +17.7%+13.566 B$ |
| Operating income | 142.559 | 32.000 | 34.323 | 37.961 | 38.275 | 79.001 | 38.398 | 40.603 | +5.7%+2.205 B$ | +18.3%+6.280 B$ |
| Operating margin | 46.7% | 45.7% | 44.9% | 48.9% | 47.1% | 45.7% | 46.3% | 45.1% | −1.2%p | +0.2%p |
| FCF | 77.412 | 20.299 | 25.568 | 25.663 | 5.882 | 35.442 | 15.803 | 19.639 | +3.836 B$ | −5.929 B$ |
| Operating cash flow | 160.506 | 37.044 | 42.647 | 45.057 | 35.758 | 102.120 | 46.679 | 55.441 | +18.8%+8.762 B$ | +30.0%+12.794 B$ |
| Cash CapEx | 83.094 | 16.745 | 17.079 | 19.394 | 29.876 | 66.678 | 30.876 | 35.802 | +16.0%+4.926 B$ | +109.6%+18.723 B$ |
| Net cash | 49.200 | 36.737 | 51.414 | 58.804 | 49.200 | 36.549 | 38.010 | 36.549 | −1.461 B$ | −14.865 B$ |
| Cash and liquid assets | 89.462 | 79.618 | 94.565 | 102.012 | 89.462 | 76.843 | 78.272 | 76.843 | −1.8%−1.429 B$ | −18.7%−17.722 B$ |
| Borrowings | 40.262 | 42.881 | 43.151 | 43.208 | 40.262 | 40.294 | 40.262 | 40.294 | +0.1%+0.032 B$ | −6.6%−2.857 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.