Microsoft experienced a 10.0% decline in its share price following the release of its Q2 2026 results, as the growth rate of Azure and the company’s significant capital expenditures (CapEx) fell short of market expectations. Despite this, Microsoft reported a milestone, surpassing US$50 billion in quarterly Microsoft Cloud revenue for the first time, showcasing steady growth and strong operational discipline. This performance is seen as the early stage of AI diffusion, which is anticipated to broadly enhance global productivity and expand the total addressable market across the technology stack.
In terms of financial performance, Microsoft’s revenue increased by 16.7% year-on-year, rising from US$69,632 million in Q2 2025 to US$81,273 million in Q2 2026. Key segments showed varied performance: Productivity and Business Processes grew by 15.9%, Intelligent Cloud surged 28.8%, but More Personal Computing declined by 2.7%. Operating income also increased by 20.9%, reaching US$38,275 million, and net income saw a substantial rise of 59.5% to US$38,458 million.
However, gross margin dipped slightly from 68.7% to 68.0% year-on-year, attributed to heavy investment in AI infrastructure and increased product usage, despite efficiency gains in Azure and a favorable sales mix. Microsoft returned US$12.7 billion to shareholders through dividends and share buybacks during this quarter.
Notably, Microsoft recorded a one-time US$7.6 billion accounting gain due to OpenAI’s restructuring, which bolstered the net income figure, although it did not reflect operational profit. Excluding this gain, underlying earnings remained stable. CapEx for the quarter totaled US$37.5 billion, with approximately two-thirds allocated for short-lived assets, particularly GPUs and CPUs to meet demand for Azure and Copilot, while the remainder focused on data centers with a lifespan exceeding 15 years. The company added one gigawatt of power capacity this quarter, although CapEx is anticipated to decrease in the next quarter due to typical variability in cloud buildout timing.
Commercial bookings surged by 230%, propelled by sizable multi-year Azure commitments from OpenAI and Anthropic. The remaining performance obligation skyrocketed 110% to US$625 billion, indicating a robust revenue pipeline. Approximately 25% of this backlog is expected to convert into revenue within the next 12 months, reflecting a 39% year-on-year increase, while commitments extending beyond that period grew by 156%.
Looking ahead, Q3 2026 revenue is projected between US$80.7 billion and US$81.8 billion, representing a growth rate of 15–17%. The anticipated growth will likely stem from commercial strength and a 3% foreign exchange tailwind, despite ongoing consumer segment challenges.
Market Context
The key growth driver for Microsoft 365 is the transition towards higher-value subscriptions. Revenue from M365 Commercial Cloud rose by 17%, underpinned by customer upgrades to the E5 tier and increased adoption of M365 Copilot, which reached 15 million paid seats—a 160% increase. On the consumer side, cloud revenue surged 29% as users opted for premium subscriptions. The traditional business remained stable, with M365 Commercial seats growing by 6%, primarily from small businesses and frontline workers.
Revenue from LinkedIn rose by 11%, driven by a 30% increase in paid video ads and strong engagement in marketing solutions. Dynamics 365 revenue increased by 19%, reflecting a trend of businesses migrating operations to Microsoft’s integrated cloud environment.
In the Intelligent Cloud segment, Azure and other cloud services revenue grew by 39%, spurred by broad demand and efficiency within Microsoft’s server fleet. Meanwhile, revenue from the on-premises server business increased by 2% due to customer purchasing ahead of expected memory price hikes.
Despite the decrease in More Personal Computing revenue—down 2.7%—driven by a decline in Windows OEM and devices—Windows 11 users grew by 45% year-on-year, reaching 1 billion.
Microsoft’s strategy of focusing on long-term value over immediate gains is evident as it balances its infrastructure investments across its portfolio. The company continues to direct capacity towards high-margin AI services, highlighting a shift towards building a diversified revenue base amid ongoing investments in AI. As Microsoft navigates this landscape, it positions itself at the forefront of AI innovation with strategic partnerships and a solid backlog of commitments, ensuring its long-term growth potential.
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