After Google’s free cash flow turned negative and AI capital spending triggered a valuation reset, expectations for Microsoft’s earnings had already come down. The key questions going into the print were straightforward: could Azure reaccelerate, and could Microsoft keep funding expanding AI investment through operating cash flow?
This quarter, Microsoft answered both with numbers the market had been looking for. Azure growth beat even optimistic forecasts, next-quarter guidance moved higher again, operating cash flow kept rising, free cash flow stayed sizable, and capital spending continued to climb. That mix pushed Microsoft shares up 8.9% in after-hours trading.
Q4 results came in ahead of expectations across major lines
For fiscal 2026 fourth quarter, Microsoft reported revenue of $90 billion, up 18% year over year and above the $87.73 billion consensus. Operating income reached $40.6 billion, also up 18%, with operating margin at roughly 45%, a slight improvement from a year earlier.
Excluding the impact of its OpenAI investment, net income was $35.3 billion, up 22%. Earnings per share came in at $4.74, ahead of the $4.25 consensus estimate. Microsoft said the quarter included a $3.2 billion gain related to its Anthropic investment, as well as lower-than-expected charges tied to a voluntary retirement program and other one-off items. Together, those factors added about $0.27 to EPS. Even excluding them, the company said revenue, operating income and EPS still came in above prior guidance.
The biggest upside driver was cloud. Intelligent Cloud revenue reached $39.3 billion, up 31% at constant currency. Azure and other cloud services revenue grew 43%, above Microsoft’s earlier 39% to 40% guidance and also ahead of a bullish 41% expectation.
Azure acceleration came from new capacity and better utilization
Microsoft tied Azure’s stronger growth to new capacity coming online and higher efficiency from the infrastructure already in place. During the quarter, the company added about 1 gigawatt of capacity and activated 31 data centers, bringing the full-year total to 88. It also said the time needed to move new GPUs in large regions from delivery to production was cut by nearly 50% from a year ago.
Efficiency gains came through chips, server systems, software scheduling and model optimization. Microsoft said Copilot workload throughput has increased fourfold since the start of this year.
With demand still running ahead of supply, those additions and efficiency gains translated quickly into revenue. Commercial remaining performance obligation reached $678 billion, up 84% year over year. Excluding OpenAI, that figure still rose 25%. Microsoft said all sequential net new bookings this quarter came from customers outside frontier model companies. For the full year, close to 90% of Microsoft cloud revenue came from customers other than frontier model companies, a sign that Azure demand is spreading across a broader enterprise base.
Productivity held up while personal computing remained weak
Revenue from Productivity and Business Processes was $37.8 billion, up 14% from a year earlier. After adjusting for the effect of the prior year’s revenue recognition timing, Microsoft 365 Commercial Cloud revenue increased 16%, Microsoft 365 Consumer Cloud revenue grew 24%, and Dynamics 365 rose 13%.
More Personal Computing revenue was $12.9 billion, down 4%. Within that segment, Windows OEM and Devices revenue fell 7%, Xbox content and services revenue declined 10%, and search and news advertising revenue, excluding traffic acquisition costs, increased 10%.
Capex kept rising, but cash flow remained resilient
Total capital expenditure in the quarter reached $41 billion, up about 69.4% from a year ago and about 28.5% from the prior quarter. Cash purchases of property and equipment were $35.8 billion, while finance leases were $5.6 billion. About two-thirds of the spending went to shorter-lived assets such as GPUs and CPUs, with the rest allocated to long-term assets including land, data centers and office facilities.
At the same time, operating cash flow climbed to $55.4 billion, up 30% year over year. Free cash flow was $19.6 billion, down 23% from a year earlier but up about 24% sequentially. The decline in free cash flow reflected the sharp increase in capital spending, but Microsoft still generated enough operating cash flow to cover current investment and retain nearly $20 billion in quarterly free cash flow.
That marked a key contrast with the earlier Google report. Microsoft is also spending heavily on AI, but Azure growth is accelerating, Copilot monetization is broadening, and operating cash flow is rising at the same time. For now, that eased concern that AI investment is crowding out cash flow or undermining returns on capital.
Accounting changes lowered reported capex outlook, not actual investment plans
Starting in fiscal 2027, Microsoft will extend the estimated useful life of data centers and office buildings to 25 years from 15 years. It will also shift more data center leases from finance leases to operating leases. Because of those accounting changes, the company lowered its reported capex outlook under calendar 2026 reporting from $190 billion to about $175 billion, while saying its actual investment plan is unchanged.
Microsoft still expects fiscal 2027 capital spending to grow year over year. Since part of the spending will move from capex into operating costs and operating cash flow under the revised classification, management said investors will need to track operating lease payments, lease liabilities and data center contractual commitments alongside reported capex when assessing the real intensity of investment.
On the call, Microsoft stressed flexibility and a broader AI payback path
Addressing concern over possible excess AI infrastructure capacity, Microsoft said about two-thirds of capex is tied to GPUs and CPUs, which have relatively short procurement and deployment cycles. If demand conditions change, the company said it can slow that portion of spending. Land and data center construction account for a smaller share of total costs, and construction as well as server move-ins can be adjusted in stages.
Management also said it has more confidence in AI investment returns than it did a year ago. It attributed that to in-house chips, infrastructure efficiency gains, lower model costs and a wider set of commercial use cases. Revenue generated by AI compute now spans Azure, Microsoft 365 Copilot, GitHub, Security and Business Applications, giving Microsoft more ways to utilize infrastructure and more flexibility in balancing workloads.
Microsoft also pointed to a multi-model architecture as a tool to reduce cost and dependency risk. This year, the number of Microsoft customers using multiple model suppliers increased fivefold. The company said it separates enterprise data, context and execution tools from the underlying model layer, allowing customers to switch models based on performance, cost and compliance requirements.
On the developer side, GitHub’s total user base reached 225 million, while GitHub Copilot users rose to 50 million. Microsoft said the platform is gradually becoming an important entry point for agentic coding.
Guidance points to another step up for Azure
For fiscal 2027 first quarter, Microsoft expects revenue of $89.85 billion to $90.95 billion, with a midpoint of about $90.4 billion. That implies year-over-year growth of 16% to 17% and sits above the roughly $89.66 billion market consensus.
Intelligent Cloud revenue is expected to reach $40.95 billion to $41.25 billion, up 33% to 34% from a year earlier. Azure revenue is expected to grow about 45% at constant currency, well above a bullish market range of 41% to 42%. Management also said Azure growth should continue to improve through the first half of fiscal 2027, though quarterly results may fluctuate because of compute supply, contract mix and the timing of new capacity coming online.
Productivity and Business Processes revenue is expected at $36.7 billion to $37 billion, up 11% to 12%. After adjusting for comparison effects, Microsoft 365 Commercial Cloud revenue is expected to rise about 16% at constant currency. More Personal Computing revenue is expected at $12.2 billion to $12.7 billion, with Windows OEM and Devices revenue projected to fall more than 20% and Xbox content and services revenue expected to decline by a mid-single-digit percentage.
Microsoft said first-quarter fiscal 2027 capex should exceed $50 billion, showing another increase in investment intensity. For the full year, the company expects both revenue and operating income to keep growing at double-digit rates, operating margin to decline by less than 1 percentage point, and free cash flow to remain positive.
What the market repriced after the report
The 8.9% move in after-hours trading reflected a repricing around three signals. Azure growth in the quarter beat optimistic expectations, and next-quarter guidance moved higher again. AI capital spending kept expanding, but operating cash flow and free cash flow remained healthy. And AI monetization is no longer centered only on Azure; it now extends to Copilot, GitHub, Security and enterprise applications, broadening the payback path for infrastructure spending.
The quarter eased concern about runaway AI spending, cloud share erosion and deteriorating free cash flow. Risks remain, including elevated capex, pressure on cloud gross margins, growing long-term lease commitments and continued weakness in personal computing.
Still, compared with a year ago, Microsoft appears to be converting AI investment into revenue more quickly, with more tools to control costs and a wider set of commercial outlets. The company has shown that high capex and positive free cash flow can coexist. The next test is whether revenue growth can keep covering depreciation, lease costs and the expanding bill for compute over time.