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MSFT · Forward model · Productivity and Business Processes · Bear case

What has to happen in Productivity and Business Processes

Model as of

This page changes Productivity and Business Processes inside the complete MSFT model. Every other vertical, corporate programme and valuation assumption stays in the selected portfolio case.

MSFT forward model
Horizon
Consolidated fair value $258.91 all other verticals held in this portfolio case
Final-quarter revenue $43.75B 38% of company revenue
Explicit segment contribution $345.22B EBITDA less segment capex, before corporate items

The build outruns the return. Microsoft spent $35.8B on property and equipment in the basis quarter, more than double a year earlier, and $115.9B across fiscal 2026 against $64.6B the year before. Free cash flow FELL 23% to $19.6B while operating cash flow ROSE 30% - the gap is the entire AI build. Gross margin has already slipped to 67.2% from 68.6% because infrastructure is a lower-margin business than software, and Intelligent Cloud's operating margin is seventeen points below Productivity's. This case runs Azure decelerating from 43% while the depreciation from what has already been bought keeps arriving, and prices Microsoft as a company whose best margins are behind it.

Productivity and Business Processes

Basis quarter$37.85B
Final quarter$43.75B
Implied CAGR+3%
Final revenue mix38%

The profit engine, and until this quarter the largest segment: $37.8B of revenue at a 57.9% operating margin, which is the highest of the three by twenty points. Microsoft 365 Commercial and Consumer, LinkedIn and Dynamics - software sold by the seat, where the incremental seat costs almost nothing to serve. Microsoft 365 Copilot passed 30 million paid seats, roughly half again what it had in April, and it is sold as an uplift on seats Microsoft already owns rather than as a new product to a new buyer. That is why this segment can grow 14% while carrying the margin it does.

Last four quarters
2025 Q3 $33.02B Reported
2025 Q4 $34.12B Reported
2026 Q1 $35.01B Reported
2026 Q2 $37.85B Estimated
Microsoft 365 CommercialMicrosoft 365 ConsumerLinkedInDynamics 365
Sequential growth +3.0%/qtr decaying toward +1.8% 3% a quarter against 8% just delivered. Seat growth plus Copilot uplift, decelerated for a base case.
Productivity and Business Processes

Latest: $43.75B (2031Q2E)

Period Value
2024Q3 $28.32B
2024Q4 $29.44B
2025Q1 $29.94B
2025Q2 $33.11B
2025Q3 $33.02B
2025Q4 $34.12B
2026Q1 $35.01B
2026Q2 $37.85B
2026Q3E $38.40B
2026Q4E $38.90B
2027Q1E $39.36B
2027Q2E $39.79B
2027Q3E $40.18B
2027Q4E $40.54B
2028Q1E $40.87B
2028Q2E $41.18B
2028Q3E $41.47B
2028Q4E $41.74B
2029Q1E $41.99B
2029Q2E $42.23B
2029Q3E $42.45B
2029Q4E $42.66B
2030Q1E $42.86B
2030Q2E $43.05B
2030Q3E $43.23B
2030Q4E $43.41B
2031Q1E $43.58B
2031Q2E $43.75B

Assumptions & reasoning

  • Revenue AND operating income are both disclosed for this segment every quarter. Nothing on this line is apportioned, which is the reverse of most models on this site - here the economics are given and the volumes are not.
  • Microsoft publishes Microsoft 365 Commercial seat GROWTH but never the seat count, and it removed Microsoft 365 Consumer subscribers as a metric in the first quarter of fiscal 2026. There is therefore no absolute volume anywhere in this segment to build a driver on.
  • The 70.1% margin here is operating income with depreciation and amortisation added back at the company-wide rate. Microsoft says in the 10-K that identifying D&A by segment is impracticable, so the add-back is uniform and this segment - which uses far less infrastructure than Intelligent Cloud - is understated by it.
  • Copilot is sold as a per-seat uplift on an existing Microsoft 365 seat, so it raises revenue per user rather than user count. That is why this segment's growth can accelerate without any change in the seat metric Microsoft reports.
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