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Microsoft Q1 Earnings Beat Estimates as Cloud Accelerates
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Key Takeaways
Microsoft reported Q1 fiscal 2027 revenues of $92.3 billion, up 19%, beating estimates by 1.88%.
Azure revenues surged 48% to $33.2 billion, while Microsoft Cloud revenues grew 30% to $63.9 billion.
Microsoft expects 2026 capital spending of $170 billion as AI demand exceeds available capacity.
Microsoft (MSFT - Free Report) reported first-quarter fiscal 2027 earnings of $4.89 per share on a non-GAAP basis (excluding OpenAI investment impacts), which increased 18% on a year-over-year basis (up 19% in constant currency). The figure beat the Zacks Consensus Estimate by 3.82%. On a GAAP basis, earnings per share were $4.92, up 32% year over year.
Revenues of $92.3 billion increased 19% year over year (up 19% in constant currency) and beat the Zacks Consensus Estimate by 1.88%. The top line came above management's guided range of $89.85-$90.95 billion, with results exceeding the company's expectations across revenues, operating income and earnings per share.
Microsoft Cloud revenues totaled $63.9 billion, up 30% year over year (31% in cc), accelerating from 27% growth in the fourth quarter of fiscal 2026. Commercial remaining performance obligation reached $677 billion, up 73% year over year, with a weighted average duration of 2.3 years. Roughly 30% of this is expected to be recognized as revenue over the next 12 months, up 29% year over year, while the portion recognized beyond 12 months increased 98%. Commercial bookings declined 12% (down 11% in cc), reflecting large Azure commitments in the prior-year quarter, partly offset by a large Azure commitment signed this quarter.
Beginning fiscal 2027, Microsoft reports results under two segments, Agents and Infra and Devices and Consumer, replacing the earlier three-segment structure. The change was announced in September 2026, and prior-period figures have been recast to conform to the new structure.
Microsoft Corporation Price, Consensus and EPS Surprise
The Agents and Infra segment generated $76.8 billion in revenue, which grew 25% year over year (25% in cc).
Azure revenues surged 48% year over year (48% in cc) to $33.2 billion, accelerating from 42% growth in the prior quarter and ahead of the company's expectations, despite delays in some third-party capacity deliveries. Growth was driven by Foundry and improved CPU monetization. Foundry revenues more than tripled year over year, aided by efficiency gains across the GPU fleet that freed up additional capacity for customers, as well as higher revenue per token.
Microsoft 365 Commercial cloud revenues increased 17% on a reported basis (18% in cc), or 18% (19% in cc) when adjusted for a prior-year comparable that had benefited from one point of in-period revenue recognition. Results were ahead of expectations on stronger GitHub Copilot adoption and usage, partially offset by weaker sales execution in Microsoft 365 E3 and stand-alone SKUs. Paid Microsoft 365 commercial seats grew 5%. Average revenue per user growth was led by premium offerings, including Microsoft 365 Copilot, E5 and E7, the latter of which has already reached millions of paid seats.
Microsoft 365 Consumer cloud revenues rose 17% (16% in cc), as the business began lapping the benefit of the prior-year price increase. Total Microsoft 365 cloud revenues were $27.8 billion, up 17%.
Productivity and server licensing revenues declined 3% (down 2% in cc) to $8.4 billion. Industry solutions cloud revenues grew 10%, driven by Dynamics 365 and LinkedIn Talent Solutions, although booking trends continued to moderate. Frontier and support services revenues rose 4% (5% in cc) to $2.1 billion.
Operating income for the segment rose to $40.6 billion from $32.7 billion a year earlier, representing an increase of 24% (25% in cc). Operating margin decreased slightly to 53% as sales mix shifted toward Azure. Microsoft Cloud gross margin was 66%, down year over year.
Devices and Consumer
The Devices and Consumer segment generated $15.5 billion in revenues, down 3% year over year (down 3% in cc), pressured by a steep decline in Windows OEM and devices revenues, partly offset by growth in search and advertising.
Search and advertising revenues, excluding traffic acquisition costs, rose 12%, ahead of expectations on higher volume and rate across LinkedIn, Edge and Bing. Xbox content and services revenues fell 2% (down 1% in cc), as declines in third-party content and Xbox Game Pass were partially offset by growth in first-party content. Windows OEM and devices revenues declined 22%, with Windows OEM revenues down 27% (down 28% in cc) due to a prior-year comparable that benefited from Windows 10 end of support, inventory drawdowns by OEM and channel partners, and weaker PC market demand.
Operating income for the segment increased to $5.4 billion from $5.2 billion a year earlier, up 2% (3% in cc). Operating margin expanded to 35%, aided by lower amortization of intangible assets from the Activision acquisition.
MSFT's Notable Developments in Q1
Microsoft announced its biggest Copilot update to date, combining Chat, Cowork, Autopilot and Code into a single unified experience across commercial and consumer users. Copilot daily users increased nearly 50% sequentially and more than five-fold year over year, while the number of customers with more than 50,000 Copilot seats rose more than eight-fold. Customers consuming Copilot credits through usage-based billing grew more than 75% in the quarter. The company did not provide an updated paid Copilot seat count this quarter.
Foundry crossed 120,000 customers, and revenues from open-source models on Foundry increased 10-fold. Microsoft completed pre-training of MAI Base 2, its next first-party base model, and released DecisionOne, a structured decision-making model used by more than 4,000 customers in its first month. Paid Fabric customers reached 44,000, up more than 50% year over year, while more than 50 million agents are now registered in Agent 365, up over 30% sequentially.
On GitHub, agent-generated pull requests increased six-fold over the past six months, and GitHub Advanced Security revenues grew more than 50% year over year. At GitHub Universe, the company announced broad availability of Copilot Fusion, which brings multi-model orchestration to software development.
Microsoft added 24 new data centers across five continents during the quarter, cut dock-to-live times for new GB300 systems in its largest regions by about 20% sequentially and docked its first NVIDIA Vera Rubin GPUs. Its in-house Maia 200 chip is delivering up to 1.7 times more tokens per watt across Teams and Copilot workloads.
LinkedIn surpassed 1.4 billion members, with time spent viewing feed content up 15% year over year. In gaming, Minecraft delivered a record quarter for engagement and revenues. The company also announced an employee voluntary exit offer, the estimated cost of which is included in its second-quarter guidance.
MSFT's Financial Performance in Q1
Gross margin reached $62.6 billion, up 17% year over year, with gross margin percentage at 68%.
Total operating expenses increased to $16.6 billion from $15.7 billion, up 6%, driven by continued investments in research and development, compute capacity and talent. Research and development expenses were $9 billion, sales and marketing were $5.7 billion, and general and administrative expenses were $1.9 billion.
Operating income increased 21% year over year (22% in cc) to $45.9 billion, while operating margin expanded slightly to 50%. Net income reached $36.6 billion, up 32% on a GAAP basis. On a non-GAAP basis, excluding OpenAI-related impacts, net income was $36.4 billion, up 18% (19% in cc).
Other income and expense, net, was a positive $38 million in the quarter compared with a negative $3.7 billion a year earlier. Excluding the impact of OpenAI investments, other income and expense was a negative $234 million.
MSFT's Q1 Capital Expenditure and Infrastructure
Capital expenditures, including finance leases, were $45.2 billion, below expectations as some anticipated third-party capacity deliveries were delayed. Roughly three-quarters of spending went toward short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs. Finance leases were $7.4 billion, while cash paid for property and equipment was $39.4 billion.
Cash flow from operations totaled $58 billion, up 29% year over year, driven by strong cloud billings and collections. Free cash flow was $18.6 billion, down from $25.7 billion a year ago, reflecting higher capital spending.
As of Sept. 30, 2026, Microsoft had total cash, cash equivalents and short-term investments of $64.5 billion compared with $76.8 billion as of June 30, 2026. Long-term debt was $31.1 billion, with an additional $4.4 billion in the current portion of long-term debt.
Microsoft returned $10.2 billion to shareholders through dividends and share repurchases during the fiscal first quarter.
MSFT's OpenAI Partnership Update
The fiscal first quarter reflected net gains from investments in OpenAI of $207 million, adding 3 cents to earnings per share. This compares with the first quarter of fiscal 2026, when net losses from OpenAI investments decreased net income and earnings per share by $3.1 billion and 41 cents, respectively.
These OpenAI-related impacts have historically created volatility in reported GAAP results, leading the company to provide non-GAAP measures excluding these effects to help investors better understand operational performance.
MSFT's Q2 2027 Outlook
For the second quarter of fiscal 2027, Microsoft expects total revenues between $96 billion and $97.1 billion, indicating growth of 18% to 19%. Based on current rates, foreign currency is not expected to have a meaningful impact on revenues, cost of revenues or operating expense growth.
The Agents and Infra segment is expected to generate revenues between $80.1 billion and $80.7 billion, indicating growth of 24% to 25%. Azure revenue growth is projected at 49% to 50% in cc, with demand continuing to exceed available supply and some third-party GPU capacity contracts delayed to the second half of the fiscal year. Microsoft 365 Commercial cloud revenues are expected to grow approximately 19% in cc, while Microsoft 365 Consumer cloud revenues are expected to grow in the low teens. Microsoft Cloud gross margin is expected to be roughly 65%.
The Devices and Consumer segment is expected to generate revenues between $15.9 billion and $16.4 billion. Search and advertising revenue growth, excluding traffic acquisition costs, is expected in the low double digits, and Xbox content and services revenues are expected to grow in the mid-to-high single digits depending on the timing of first- and third-party content launches. Windows OEM and devices revenues are expected to decline in the mid-30s percentage range.
Cost of revenues is projected between $32.7 billion and $32.9 billion, up 26% to 27%, while operating expenses are expected between $18.5 billion and $18.6 billion, up 9%. Operating margin is expected to decline slightly year over year. Excluding any impact from OpenAI investments, other income and expense is expected to be roughly negative $300 million, and the effective tax rate is projected at approximately 20%.
Capital expenditures are expected to exceed $50 billion in the second quarter. Given the third-party capacity delays, Microsoft now expects calendar 2026 capital spending of approximately $170 billion, with spending expected to accelerate in the second half of fiscal 2027. The company expects to remain free cash flow positive in fiscal 2027.
MSFT’s Zacks Rank and Stocks to Consider
Currently, Microsoft carries a Zacks Rank #3 (Hold).
Shares of Analog Devices have rallied 54.4% year to date. The Zacks Consensus Estimate for ADI’s fiscal 2026 earnings is pegged at $13.00 per share, up by a penny over the past seven days, indicating an increase of 66.9% year over year.
Shares of Applied Materials have jumped 54.5% year to date. The Zacks Consensus Estimate for AMAT’s fiscal 2026 earnings is pegged at $12.79 per share, unchanged over the past 30 days, indicating a rise of 35.8% year over year.
Cisco Systems shares have surged 45.3% year to date. The Zacks Consensus Estimate for CSCO’s fiscal 2027 earnings is pegged at $5.11 per share, unchanged over the past 30 days, indicating an increase of 18% year over year.
View the Zacks #1 Rank List
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Microsoft Q1 Earnings Beat Estimates as Cloud Accelerates
Key Takeaways
Microsoft (MSFT - Free Report) reported first-quarter fiscal 2027 earnings of $4.89 per share on a non-GAAP basis (excluding OpenAI investment impacts), which increased 18% on a year-over-year basis (up 19% in constant currency). The figure beat the Zacks Consensus Estimate by 3.82%. On a GAAP basis, earnings per share were $4.92, up 32% year over year.
Revenues of $92.3 billion increased 19% year over year (up 19% in constant currency) and beat the Zacks Consensus Estimate by 1.88%. The top line came above management's guided range of $89.85-$90.95 billion, with results exceeding the company's expectations across revenues, operating income and earnings per share.
Microsoft Cloud revenues totaled $63.9 billion, up 30% year over year (31% in cc), accelerating from 27% growth in the fourth quarter of fiscal 2026. Commercial remaining performance obligation reached $677 billion, up 73% year over year, with a weighted average duration of 2.3 years. Roughly 30% of this is expected to be recognized as revenue over the next 12 months, up 29% year over year, while the portion recognized beyond 12 months increased 98%. Commercial bookings declined 12% (down 11% in cc), reflecting large Azure commitments in the prior-year quarter, partly offset by a large Azure commitment signed this quarter.
Beginning fiscal 2027, Microsoft reports results under two segments, Agents and Infra and Devices and Consumer, replacing the earlier three-segment structure. The change was announced in September 2026, and prior-period figures have been recast to conform to the new structure.
Microsoft Corporation Price, Consensus and EPS Surprise
Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote
MSFT's Q1 Segment Performance
Agents and Infra
The Agents and Infra segment generated $76.8 billion in revenue, which grew 25% year over year (25% in cc).
Azure revenues surged 48% year over year (48% in cc) to $33.2 billion, accelerating from 42% growth in the prior quarter and ahead of the company's expectations, despite delays in some third-party capacity deliveries. Growth was driven by Foundry and improved CPU monetization. Foundry revenues more than tripled year over year, aided by efficiency gains across the GPU fleet that freed up additional capacity for customers, as well as higher revenue per token.
Microsoft 365 Commercial cloud revenues increased 17% on a reported basis (18% in cc), or 18% (19% in cc) when adjusted for a prior-year comparable that had benefited from one point of in-period revenue recognition. Results were ahead of expectations on stronger GitHub Copilot adoption and usage, partially offset by weaker sales execution in Microsoft 365 E3 and stand-alone SKUs. Paid Microsoft 365 commercial seats grew 5%. Average revenue per user growth was led by premium offerings, including Microsoft 365 Copilot, E5 and E7, the latter of which has already reached millions of paid seats.
Microsoft 365 Consumer cloud revenues rose 17% (16% in cc), as the business began lapping the benefit of the prior-year price increase. Total Microsoft 365 cloud revenues were $27.8 billion, up 17%.
Productivity and server licensing revenues declined 3% (down 2% in cc) to $8.4 billion. Industry solutions cloud revenues grew 10%, driven by Dynamics 365 and LinkedIn Talent Solutions, although booking trends continued to moderate. Frontier and support services revenues rose 4% (5% in cc) to $2.1 billion.
Operating income for the segment rose to $40.6 billion from $32.7 billion a year earlier, representing an increase of 24% (25% in cc). Operating margin decreased slightly to 53% as sales mix shifted toward Azure. Microsoft Cloud gross margin was 66%, down year over year.
Devices and Consumer
The Devices and Consumer segment generated $15.5 billion in revenues, down 3% year over year (down 3% in cc), pressured by a steep decline in Windows OEM and devices revenues, partly offset by growth in search and advertising.
Search and advertising revenues, excluding traffic acquisition costs, rose 12%, ahead of expectations on higher volume and rate across LinkedIn, Edge and Bing. Xbox content and services revenues fell 2% (down 1% in cc), as declines in third-party content and Xbox Game Pass were partially offset by growth in first-party content. Windows OEM and devices revenues declined 22%, with Windows OEM revenues down 27% (down 28% in cc) due to a prior-year comparable that benefited from Windows 10 end of support, inventory drawdowns by OEM and channel partners, and weaker PC market demand.
Operating income for the segment increased to $5.4 billion from $5.2 billion a year earlier, up 2% (3% in cc). Operating margin expanded to 35%, aided by lower amortization of intangible assets from the Activision acquisition.
MSFT's Notable Developments in Q1
Microsoft announced its biggest Copilot update to date, combining Chat, Cowork, Autopilot and Code into a single unified experience across commercial and consumer users. Copilot daily users increased nearly 50% sequentially and more than five-fold year over year, while the number of customers with more than 50,000 Copilot seats rose more than eight-fold. Customers consuming Copilot credits through usage-based billing grew more than 75% in the quarter. The company did not provide an updated paid Copilot seat count this quarter.
Foundry crossed 120,000 customers, and revenues from open-source models on Foundry increased 10-fold. Microsoft completed pre-training of MAI Base 2, its next first-party base model, and released DecisionOne, a structured decision-making model used by more than 4,000 customers in its first month. Paid Fabric customers reached 44,000, up more than 50% year over year, while more than 50 million agents are now registered in Agent 365, up over 30% sequentially.
On GitHub, agent-generated pull requests increased six-fold over the past six months, and GitHub Advanced Security revenues grew more than 50% year over year. At GitHub Universe, the company announced broad availability of Copilot Fusion, which brings multi-model orchestration to software development.
Microsoft added 24 new data centers across five continents during the quarter, cut dock-to-live times for new GB300 systems in its largest regions by about 20% sequentially and docked its first NVIDIA Vera Rubin GPUs. Its in-house Maia 200 chip is delivering up to 1.7 times more tokens per watt across Teams and Copilot workloads.
LinkedIn surpassed 1.4 billion members, with time spent viewing feed content up 15% year over year. In gaming, Minecraft delivered a record quarter for engagement and revenues. The company also announced an employee voluntary exit offer, the estimated cost of which is included in its second-quarter guidance.
MSFT's Financial Performance in Q1
Gross margin reached $62.6 billion, up 17% year over year, with gross margin percentage at 68%.
Total operating expenses increased to $16.6 billion from $15.7 billion, up 6%, driven by continued investments in research and development, compute capacity and talent. Research and development expenses were $9 billion, sales and marketing were $5.7 billion, and general and administrative expenses were $1.9 billion.
Operating income increased 21% year over year (22% in cc) to $45.9 billion, while operating margin expanded slightly to 50%. Net income reached $36.6 billion, up 32% on a GAAP basis. On a non-GAAP basis, excluding OpenAI-related impacts, net income was $36.4 billion, up 18% (19% in cc).
Other income and expense, net, was a positive $38 million in the quarter compared with a negative $3.7 billion a year earlier. Excluding the impact of OpenAI investments, other income and expense was a negative $234 million.
MSFT's Q1 Capital Expenditure and Infrastructure
Capital expenditures, including finance leases, were $45.2 billion, below expectations as some anticipated third-party capacity deliveries were delayed. Roughly three-quarters of spending went toward short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs. Finance leases were $7.4 billion, while cash paid for property and equipment was $39.4 billion.
Cash flow from operations totaled $58 billion, up 29% year over year, driven by strong cloud billings and collections. Free cash flow was $18.6 billion, down from $25.7 billion a year ago, reflecting higher capital spending.
As of Sept. 30, 2026, Microsoft had total cash, cash equivalents and short-term investments of $64.5 billion compared with $76.8 billion as of June 30, 2026. Long-term debt was $31.1 billion, with an additional $4.4 billion in the current portion of long-term debt.
Microsoft returned $10.2 billion to shareholders through dividends and share repurchases during the fiscal first quarter.
MSFT's OpenAI Partnership Update
The fiscal first quarter reflected net gains from investments in OpenAI of $207 million, adding 3 cents to earnings per share. This compares with the first quarter of fiscal 2026, when net losses from OpenAI investments decreased net income and earnings per share by $3.1 billion and 41 cents, respectively.
These OpenAI-related impacts have historically created volatility in reported GAAP results, leading the company to provide non-GAAP measures excluding these effects to help investors better understand operational performance.
MSFT's Q2 2027 Outlook
For the second quarter of fiscal 2027, Microsoft expects total revenues between $96 billion and $97.1 billion, indicating growth of 18% to 19%. Based on current rates, foreign currency is not expected to have a meaningful impact on revenues, cost of revenues or operating expense growth.
The Agents and Infra segment is expected to generate revenues between $80.1 billion and $80.7 billion, indicating growth of 24% to 25%. Azure revenue growth is projected at 49% to 50% in cc, with demand continuing to exceed available supply and some third-party GPU capacity contracts delayed to the second half of the fiscal year. Microsoft 365 Commercial cloud revenues are expected to grow approximately 19% in cc, while Microsoft 365 Consumer cloud revenues are expected to grow in the low teens. Microsoft Cloud gross margin is expected to be roughly 65%.
The Devices and Consumer segment is expected to generate revenues between $15.9 billion and $16.4 billion. Search and advertising revenue growth, excluding traffic acquisition costs, is expected in the low double digits, and Xbox content and services revenues are expected to grow in the mid-to-high single digits depending on the timing of first- and third-party content launches. Windows OEM and devices revenues are expected to decline in the mid-30s percentage range.
Cost of revenues is projected between $32.7 billion and $32.9 billion, up 26% to 27%, while operating expenses are expected between $18.5 billion and $18.6 billion, up 9%. Operating margin is expected to decline slightly year over year. Excluding any impact from OpenAI investments, other income and expense is expected to be roughly negative $300 million, and the effective tax rate is projected at approximately 20%.
Capital expenditures are expected to exceed $50 billion in the second quarter. Given the third-party capacity delays, Microsoft now expects calendar 2026 capital spending of approximately $170 billion, with spending expected to accelerate in the second half of fiscal 2027. The company expects to remain free cash flow positive in fiscal 2027.
MSFT’s Zacks Rank and Stocks to Consider
Currently, Microsoft carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader Zacks Computer and Technology sector are Analog Devices (ADI - Free Report) , Applied Materials (AMAT - Free Report) and Cisco Systems (CSCO - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Analog Devices have rallied 54.4% year to date. The Zacks Consensus Estimate for ADI’s fiscal 2026 earnings is pegged at $13.00 per share, up by a penny over the past seven days, indicating an increase of 66.9% year over year.
Shares of Applied Materials have jumped 54.5% year to date. The Zacks Consensus Estimate for AMAT’s fiscal 2026 earnings is pegged at $12.79 per share, unchanged over the past 30 days, indicating a rise of 35.8% year over year.
Cisco Systems shares have surged 45.3% year to date. The Zacks Consensus Estimate for CSCO’s fiscal 2027 earnings is pegged at $5.11 per share, unchanged over the past 30 days, indicating an increase of 18% year over year.