Microsoft (NASDAQ:MSFT) executives used the company’s fiscal 2026 second-quarter earnings call to highlight accelerating demand for cloud and artificial intelligence products, while also addressing investor questions about the pace of capital spending and the path from infrastructure investment to revenue and margins.
Cloud tops $50 billion as AI demand drives capacity build-out
CEO Satya Nadella said “Microsoft Cloud surpassed $50 billion in revenue for the first time,” and described the quarter as evidence of “accelerating demand.” He framed Microsoft’s strategy across three layers: “cloud and token factory,” the “agent platform,” and “high-value agentic experiences.”
At the silicon layer, Nadella pointed to a mix of NVIDIA and AMD GPUs and Microsoft’s own chips. He said Microsoft brought online its Maia 200 accelerator, describing it as delivering “10+ petaflops at FP4 precision” with “over 30% improved TCO compared to the latest generation hardware” in Microsoft’s fleet. He also highlighted the Cobalt 200 CPU, which he said delivers “over 50% higher performance” compared with Microsoft’s first custom processor for cloud-native workloads.
Microsoft also discussed sovereignty as an increasing customer priority. Nadella said the company announced data center investments in “seven countries this quarter alone” and described Microsoft’s offerings across “public, private, and national partner clouds” for data residency and local control.
Agent platform and data layer: Foundry and Fabric momentum
Nadella positioned “agents as the new apps,” arguing that customers will need a full set of platform capabilities to build and manage them, including model choice, orchestration, context engineering, safety, observability, and security. He said Microsoft added support for “GPT-5 too” and “Claude 4.5,” and noted that “over 1,500 customers have used both Anthropic and OpenAI models on Foundry.” He also cited growing interest in region-specific and “sovereign AI choices,” including models such as Mistral and Cohere.
He highlighted momentum in Microsoft’s data and context tools, including Foundry Knowledge and Fabric. Nadella said Fabric’s annual revenue run rate is now “over $2 billion,” with “over 31,000 customers,” and that revenue was up “60% year-over-year.” He also said customers spending $1 million-plus per quarter on Foundry grew “nearly 80%,” and that “over 250 customers are on track to process over 1 trillion tokens on Foundry this year.”
For low-code and no-code agent creation, Nadella said “over 80% of the Fortune 500 have active agents built” using Copilot Studio and Agent Builder. He also introduced “Agent 365,” describing it as a control plane that extends Microsoft’s governance, identity, security, and management controls to agents, including those deployed “on our cloud or any other cloud.” He said partners including Adobe, Databricks, NVIDIA, SAP, ServiceNow, and Workday are integrating with Agent 365.
Copilot adoption across consumer, productivity, coding, and security
Nadella said Microsoft is seeing momentum across its Copilot portfolio. In consumer, he reported daily users of the Copilot app increased “nearly 3x year-over-year,” and said Copilot Checkout includes partnerships with PayPal, Shopify, and Stripe to enable purchases inside the app.
In Microsoft 365, Nadella said usage and adoption improved, reporting that average conversations per user “doubling year-over-year” and daily active users increasing “10x year-over-year.” He said it was a “record quarter” for Microsoft 365 Copilot seat adds, up “over 160% year-over-year,” and that Microsoft now has “15 million paid Microsoft 365 Copilot seats.” He also said the number of customers with more than 35,000 seats “tripled year-over-year,” citing large purchases including Publicis buying “over 95,000 seats.”
In coding, Nadella said Microsoft has “4.7 million paid Copilot subscribers,” up “75% year-over-year,” and that Copilot Pro plus subscriptions for individual developers increased “77% quarter-over-quarter.” He also discussed GitHub Agent HQ and the GitHub Copilot SDK as ways to organize and embed agentic coding capabilities.
In security, he said Microsoft added “a dozen new and updated Security Copilot agents” across Defender, Entra, Intune, and Purview. He noted Purview audited “24 billion Copilot interactions” in the quarter, up “9x year-over-year.”
Nadella also called out healthcare and science/engineering as emerging agentic opportunities. He said Dragon Copilot is used by “over 100,000 medical providers,” and that Microsoft helped document “21 million patient encounters” in the quarter, up “3x year-over-year.”
Financial results: revenue $81.3B; Cloud revenue $51.5B; CapEx $37.5B
CFO Amy Hood said Microsoft “again exceeded expectations across revenue, operating income, and earnings per share.” She reported revenue of $81.3 billion (up 17%), operating income up 21%, and earnings per share of $4.14, up 24%. Gross margin percentage was 68%, down slightly year-over-year, which Hood attributed primarily to investments in AI infrastructure and growing AI product usage, partially offset by efficiency gains and mix.
Hood said capital expenditures were $37.5 billion, with roughly two-thirds in short-lived assets such as GPUs and CPUs. She said demand “continues to exceed our supply,” and described balancing allocations among Azure demand, first-party AI services like Microsoft 365 Copilot and GitHub Copilot, R&D needs, and replacement of end-of-life equipment. Cash flow from operations was $35.8 billion, up 60%, and free cash flow was $5.9 billion, down sequentially due to higher cash capital expenditures from a lower mix of finance leases. Microsoft returned $12.7 billion to shareholders through dividends and repurchases, up 32% year-over-year.
Hood also discussed the accounting treatment of Microsoft’s OpenAI investment, saying that due to OpenAI’s recapitalization Microsoft now records gains or losses based on its share of changes in OpenAI’s net assets. She said Microsoft recorded a gain that drove other income and expense to $10 billion in GAAP results; excluding OpenAI, other income and expense was “slightly negative” and lower than expected due to net losses on investments.
Bookings and outlook: OpenAI RPO concentration, Q3 guidance, and investor ROI questions
Commercial bookings increased 230%, driven by what Hood described as a previously announced large Azure commitment from OpenAI and a previously announced Anthropic commitment, alongside healthy growth in core annuity motions. Commercial remaining performance obligation (RPO) rose to $625 billion, up 110% year-over-year, with a weighted average duration of roughly 2.5 years. Hood said about 45% of commercial RPO is from OpenAI, while the remaining balance grew 28% and reflects broad demand across industries and geographies.
During Q&A, Hood and Nadella addressed concerns that capital spending is rising faster than Azure growth. Hood said it can be helpful to think of Azure guidance as “an allocated capacity guide,” noting GPU and CPU capacity is also being used for first-party products (including Microsoft 365 Copilot and GitHub Copilot) and for R&D. She added that if the GPUs brought online in Q1 and Q2 had been allocated entirely to Azure, the KPI “would have been over 40.” Nadella said investors should consider the gross margin and lifetime value profile of Azure alongside first-party AI businesses such as Microsoft 365 Copilot, GitHub Copilot, Dragon Copilot, and Security Copilot, and said Microsoft aims to optimize its long-term portfolio while supply constrained.
On the relationship between hardware investment and monetization, Hood said “the majority of the capital that we’re spending today…[is] already contracted for most of [the assets’] useful life,” adding that large GPU contracts are “sold for the entire useful life of the GPU.” Nadella added that Microsoft uses software to run newer models on an aging fleet and said efficiency tends to improve over time, supporting margin improvement on contracted assets.
For fiscal Q3, Hood guided to revenue of $80.65 billion to $81.75 billion. She expects Microsoft Cloud gross margin percentage to be roughly 65%, down year-over-year due to AI investments. Segment guidance included:
- Productivity and Business Processes: $34.25B to $34.55B revenue
- Intelligent Cloud: $34.1B to $34.4B revenue; Azure growth expected at 37% to 38% in constant currency
- More Personal Computing: $12.3B to $12.8B revenue
Hood said operating margins should be down slightly year-over-year in Q3, but added that with first-half execution and mix benefits, Microsoft now expects fiscal 2026 operating margins “to be up slightly.”
About Microsoft (NASDAQ:MSFT)
Microsoft Corporation is a global technology company headquartered in Redmond, Washington. Founded in 1975 by Bill Gates and Paul Allen, Microsoft develops, licenses and supports a broad range of software products, services and devices for consumers, enterprises and governments worldwide. Its operations span personal computing, productivity software, cloud infrastructure, enterprise applications, developer tools and gaming.
Microsoft’s product portfolio includes the Windows operating system and the Microsoft 365 suite of productivity and collaboration tools (Office apps, Outlook, Teams).
