Microsoft Corporation · Q2 2026 call

It was a very strong close to what was a record fiscal year for us. All up, our annual revenue surpassed $331 billion, up 18%. Microsoft Cloud surpassed $214 billion, up 27%, and Azure surpassed $100 billion, up 41%.

We added 31 new data centers across five continents this quarter, bringing the total to 88 this year as we expand our footprint in response to accelerating demand. […] All up, we added another gigawatt of capacity this quarter and remain on track to roughly double our overall capacity in just two years.

Just two months in, Agent 365 now has nearly 40 million agents registered across tens of thousands of companies.

When it comes to knowledge work, we now have over 30 million paid Microsoft 365 Copilot seats with net seat adds more than doubling quarter-over-quarter.

All up, GitHub now has 225 million users as organizations across every industry, including over 90% of the Fortune 500, choose GitHub for their AI-powered development. The agentic era is being built on GitHub. Every major coding agent runs on the platform, and one in three pull requests on GitHub now involves an agent.

When it comes to Xbox, we are making the necessary decisions required across our content portfolio platform and operations to reset the business for long-term growth. We have the best IP in the industry and talented studios around the world and believe we can bring these strengths together and expect to return the business to growth in fiscal 2027.

Total company headcount declined 2% year-over-year.

Capital expenditures were $41 billion, including the impact from higher component pricing as noted in our guide. Roughly two-thirds of our CapEx was for short-lived assets, primarily CPUs and GPUs, as customers increasingly build solutions that leverage both AI and non-AI infrastructure.

Cash flow from operations was $55.4 billion, up 30%, driven by strong cloud billings and collections, partially offset by an increase in operating lease payments. Free cash flow was $19.6 billion, reflecting higher capital expenditures.

Commercial remaining performance obligation grew 84% to $678 billion. All sequential commercial RPO growth was driven by commitments from customers outside of Frontier Model companies, and RPO increased 25% when excluding OpenAI.

effective at the start of FY 2027, we are extending the estimated useful life of our data centers and office buildings from 15- 25 years, reflecting our operating history and expected use of these assets. […] The greater impact is on capital expenditures, as more of our future data center leases will shift from finance leases to operating leases as a result of this update. Finance leases are included in capital expenditures, while operating leases are not.

Outside of this useful life impact, our calendar year 2026 CapEx investment expectations remain unchanged. However, the shift from finance to operating leases adjusts our expectation to approximately $175 billion.

Growth in Windows OEM and devices will be impacted by lower PC market demand as higher component costs increase device pricing, a prior year comparable that benefited from Windows 10 end of support, and elevated inventory levels. As a result, we expect revenue to decline in the high teens for the fiscal year.

At the company level, with strong commercial momentum, we continue to expect another fiscal year of double-digit revenue and operating income growth. […] We expect FY 2027 capital expenditures will grow year-over-year, given demand signals across our portfolio. Even as we invest to meet growing demand, full fiscal year operating margins should be down less than a point. In addition, we expect to remain free cash flow positive in FY 2027.

In Azure, we expect revenue growth of approximately 45% in constant currency, we remain focused on delivering efficiencies that help us bridge the gaps we see as customer demand continues to exceed supply.

We expect CapEx spend will be over $50 billion, including the lease reclassification impact from the useful life update.

you've got to keep your harness separate from the model. The harness will ensure that your memory, your context, all of that is external. That means any given model at any given time is swappable.

you can't depend on any one model. You will maybe need multiple models to even remediate some challenges that get caused by one model. […] you can't be subject to the refusal of the one model.

There are still constraints in the system. I think we've continued to say, I think now for a number of quarters, that demand continues to exceed available supply, that certainly remains true. You can even see it, I think, in some of the pricing that's occurring in the spot market for assets.

You've seen our CapEx really pivot toward what I would call and do call short-lived assets, which really, right, that's CPUs and GPUs that have relatively shorter lead times. If the demand environment changes, you just slow down what is, in fact, the largest component, right, and the driver of COGS.

Then we know that there will be ups and downs of what is the cycle here, but the secular shift is clear, and we are very bullish about us coming with the right sort of mix of business and the right margin structure, and most importantly, with the right value for our customers.

The work, frankly, on model diversification also is a margin improvement opportunity. Being able to serve the best possible outcome with a more efficient, or both efficient in terms of token usage and efficient in terms of cost structure, are also margin levers.