guidanceterminal
MSFT
Microsoft Corporation
GuidanceAnalysisEarningsNewsComments
Upside analysis

  1. OpenAI partnership—expanded scope, exclusivity, and massive Azure commitments

    • New definitive agreement closed (Oct. 28–29, 2025 timing referenced as “yesterday”); marks next chapter of partnership
    • MSFT has “roughly 10x-ed” its investment; cites strong ROI
    • OpenAI contracted incremental $250B of Azure services; excluded from Q1 results; expected to positively impact bookings going forward
    • Rev-share, exclusive IP rights and API exclusivity for Azure continue until AGI or through 2030; model and product IP rights extended through 2032
    • Partnership provides increased certainty around IP and AGI definition per management
    • Azure chosen to power OpenAI workloads; deal to increase volatility in OI&E—guidance henceforth excludes OpenAI investment impacts
    Quotes
    Amy Hood
    we were pleased to announce the next phase of our partnership with OpenAI yesterday. They continue to choose Microsoft to power their workloads.
    Our Q1 results were not impacted by the deal signed this week.
    These results do not include any impact from the incremental $250 billion Azure commitments from OpenAI announced yesterday.
    The combination of OpenAI's conversion to a public benefit corp and the ongoing nature of our partnership will result in increased volatility. Therefore, going forward, we'll provide our outlook, excluding any impact from our investments in OpenAI.
    Satya Nadella
    we closed a new definitive agreement with OpenAI, marking the next chapter in what is one of the most successful partnerships and investments our industry has ever seen.
    Already, we have roughly 10x-ed our investment. OpenAI has contracted an incremental $250 billion of Azure services, our rev share, exclusive IP rights and API exclusivity for Azure continue until AGI or through 2030. And we have extended the model and product IP rights through 2032.
    Amy Hood (Q&A)
    We're thrilled to have OpenAI be a piece of that. We're learning a ton and building leading systems because of it that are being used at scale that benefits every other customer.
    Satya Nadella (Q&A)
    I think we will be in this jagged intelligence phase for a long time… we feel very, very good about building these as organizing layers for agents to help customers.

  2. AI infrastructure scale-up and efficiency—capacity expansion, fungible fleet, sovereignty

    • Most expansive data center fleet for AI era; adding capacity at unprecedented scale
    • Total AI capacity to increase >80% in FY26; total data center footprint to roughly double over next 2 years
    • Announced Fairwater (Wisconsin) as “world's most powerful AI data center,” going online next year; scales to 2 GW
    • Deployed world's first large-scale cluster of NVIDIA GB300s
    • Fungible fleet spanning pretraining, post-training, synthetic data generation, inference; also supports recommenders, databases, streaming
    • Optimization across silicon, systems, software; improved ROI/TCO
    • Token throughput for GPT-4.1 and GPT-5 increased >30% per GPU (software efficiency gain)
    • Digital sovereignty: Azure customers in 33 countries developing cloud/AI within borders; example: OpenAI and SAP in Germany using Azure for public sector
    • CapEx $34.9B in Q1; ~50% short-lived assets (GPUs/CPUs); remaining long-lived incl. $11.1B finance leases for large data center sites; CFO underscores confidence in utilization and matching of asset lives to contracts
    Quotes
    Amy Hood
    Capital expenditures were $34.9 billion, driven by growing demand for our Cloud and AI offerings.
    roughly half of our spend was on short-lived assets, primarily GPUs and CPUs… The remaining spend was for long-lived assets… including $11.1 billion of finance leases that are primarily for large data center sites.
    Satya Nadella
    We have the most expansive data center fleet for the AI era, and we are adding capacity at an unprecedented scale.
    We will increase our total AI capacity by over 80% this year and roughly double our total data center footprint over the next 2 years…
    we announced the world's most powerful AI data center, Fairwater in Wisconsin, which will go online next year and scale to 2 gigawatts alone.
    we have deployed the world's first large-scale cluster of NVIDIA GB300s.
    it's this combination of fungibility and continuous optimization that allows us to deliver the best ROI and TCO for us and our customers.
    during the quarter, we increased the token throughput for GPT-4.1 and GPT-5… by over 30% per GPU.
    We also have the most comprehensive digital sovereignty platform. Azure customers in 33 countries are now developing their own cloud and AI capabilities within their borders…
    In Germany, for example, OpenAI and SAP will rely on Azure to deliver new AI solutions to the public sector.
    Amy Hood (Q&A)
    we're pivoting toward -- increasingly, we talked about this short-lived assets, both GPUs and CPUs… short-lived assets generally are done to match sort of the duration of the contracts…
    we have been short now for many quarters. I thought we were going to catch up, we are not. Demand is increasing.
    Satya Nadella (Q&A)
    we have to start with building out a very fungible fleet… across the globe for inference, for pre-training, for post-training…
    keep improving utilization, keep improving the efficiency… 30% improvement on both serving up GPT-4.1 and 5.0, right? That's software.

  3. Azure growth and outlook—share gains, capacity-constrained demand, guidance

    • Azure and other cloud services revenue up 40% (+39% cc) in Q1; results ahead of expectations
    • Demand again exceeded supply across workloads even as capacity added; indicates strong pipeline
    • Azure took share again per CEO
    • Q2 guidance: Azure revenue growth ~37% cc; demand remains significantly ahead of available capacity
    • Company expects to be capacity constrained through at least end of FY26; balancing Azure growth with 1P apps/AI, R&D, and end-of-life replacements
    • On-prem server revenue up 1% (ahead of expectations) due to Windows Server 2025 transactional purchasing
    Quotes
    Amy Hood
    In Azure and other Cloud services… revenue grew 40% and 39% in constant currency. Results were ahead of expectations, driven by better-than-expected growth in our core infrastructure business, primarily from our largest customers.
    this quarter, demand again exceeded supply across workloads, even as we brought more capacity online.
    In Azure, we expect Q2 revenue growth of approximately 37% in constant currency as demand remains significantly ahead of the capacity we have available.
    we now expect to be capacity constrained through at least the end of our fiscal year.
    Satya Nadella
    These kinds of real production scale AI deployments are driving Azure's overall growth. And once again, this quarter, Azure took share.
    Amy Hood (Q&A)
    we have been short in Azure, and we've been clear on it… it is safe to say that the number could be higher.

  4. Microsoft Cloud momentum—revenue growth, margin discipline

    • Microsoft Cloud revenue $49.1B, up 26% (+25% cc), ahead of expectations
    • Microsoft Cloud gross margin percentage 68%, slightly better than expected (down YoY due to AI investments); partially offset by efficiency gains
    • Company gross margin dollars +18%; operating income +24%; EPS $4.13 +23% (adj. for OpenAI impacts)
    • Operating margin 49% (ahead of expectations); demonstrates leverage despite AI scaling
    Quotes
    Amy Hood
    Microsoft Cloud revenue was $49.1 billion, ahead of expectations and grew 26% and 25% in constant currency.
    Microsoft Cloud gross margin percentage was slightly better than expected at 68%…
    we delivered a strong start to our fiscal year, exceeding expectations across revenue, operating income and earnings per share.
    Satya Nadella
    Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year.

  5. Record bookings and RPO—breadth, short duration, future revenue visibility

    • Commercial bookings +112% (+111% cc), significantly ahead of expectations; driven by Azure commitments from OpenAI and growing number of $100M+ contracts for both Azure and M365
    • Commercial RPO $392B, +51% YoY; balance nearly doubled over past 2 years
    • Weighted average RPO duration ~2 years; implies near-term consumption and value recognition
    • Q2: Commercial bookings expected to be positively impacted by significant OpenAI commitments announced
    • Management emphasizes breadth across products and customer sizes; consumption in short order
    Quotes
    Amy Hood
    Commercial bookings increased 112% and 111% in constant currency and were significantly ahead of expectations, driven by Azure commitments from OpenAI as well as continued growth in the number of $100 million-plus contracts for both Azure and M365.
    Commercial remaining performance obligation increased to $392 billion and was up 51% year-over-year. The balance has nearly doubled over the past 2 years.
    our weighted average duration has been relatively stable at approximately 2 years.
    we expect commercial bookings will be positively impacted by the significant OpenAI commitments announced yesterday.
    Amy Hood (Q&A)
    It covers numerous products. It covers customers of all sizes.
    most of that is being consumed in relatively short order. People are not consuming… unless there's value.

  1. M365 Copilot adoption and agentic innovation—rapid uptake, high-value customers, ecosystem

    • 900M MAU of AI features across products; first-party Copilots >150M MAU
    • M365 Copilot chat adoption accelerating; usage up 50% QoQ within 9 months of release; tens of millions of users already using chat
    • Agent Mode introduced: turns single prompts into export-quality Word/Excel/PowerPoint; benchmarked best-in-class
    • Teams mode enables multiplayer Copilot; collaborative agents (Facilitator, Project Manager) automate meetings and group tasks
    • Growing agent ecosystem: Adobe, Asana, Jira, LexisNexis, SAP, ServiceNow, Snowflake, Workday building agents; overall agent users doubled QoQ
    • App Builder announced to let anyone create task-specific apps/agents grounded in M365
    • Enterprise adoption: >90% of Fortune 500 now use M365 Copilot
    • Large seat purchases Q1: Accenture, Bristol-Myers Squibb, EY Global, U.K. HMRC each >15k seats; Lloyds Banking Group 30k seats saving ~46 minutes/employee/day
    • PwC added 155k seats in Q1; >200k deployed; 30M interactions in 6 months; credited with saving millions of hours
    • M365 Commercial Cloud growth drivers include ARPU via E5 and M365 Copilot

  2. GitHub Copilot & Agent HQ—developer adoption and platform control plane

    • GitHub Copilot >26M users; most popular AI pair programmer
    • GitHub community >180M developers; fastest growth in its history; “adding a developer every second”
    • 80% of new developers start with Copilot within first week
    • Record usage: >500M pull requests merged over past year; rise of AI coding agents driving usage
    • Agent HQ introduced as organizing layer for coding agents across models (OpenAI, Anthropic, Google, Cognition, xAI, OSS/in-house); provides controls, observability, governance
    • Enterprise example: tens of thousands of AMD developers use GitHub Copilot; accept hundreds of thousands of code lines/month; save months of development time
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  1. Azure scale & share gains (capacity, regions, leadership)

    • Azure annual revenue >$75B; up 34% y/y (FY25)
    • Took share every quarter in FY25 in AI infrastructure
    • Opened new DCs across 6 continents; >400 data centers across 70 regions; more than any other cloud provider
    • Stood up >2 GW new capacity in past 12 months; scaling own DC capacity faster than any competitor
    • Every Azure region now AI-first; all regions support liquid cooling; increases fleet fungibility/flexibility
    • Accelerating migrations in Q4; example: Nestlé migrated >200 SAP instances, 10k+ servers, 1.2 PB data to Azure with near-zero disruption; cited as one of largest/successful migrations in business history
    • Cloud-native apps scaling on Azure beyond AI; new customers coming for AI and staying for broader workloads
    • Azure and other cloud services revenue +39% y/y in Q4; significantly ahead of expectations; driven by accelerated core infrastructure growth primarily from largest customers
    • On-prem to Azure migrations still mid-innings; healthy momentum including VMware, SAP, Microsoft server migrations

  2. AI infrastructure efficiency & model throughput

    • GPT-4o family: software optimizations delivering +90% tokens per GPU vs a year ago
    • Compounding S-curves across silicon, systems, models to improve efficiency/performance
    • All regions liquid-cooled; supports high-density AI workloads; enhances fleet flexibility
    • Software optimizations viewed as key differentiator for hyperscale yield improvement
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  1. Microsoft Cloud revenue outperformance & margin discipline

    • Microsoft Cloud revenue $42.4B; grew 20% reported, 22% cc; ahead of expectations (Q3 FY25)
    • Microsoft Cloud gross margin % 69%; down 3 pts YoY due to AI infra scaling; in line with expectations
    • Company operating margin 46%; up 1 pt YoY; better than expected
    • Operating expenses +2% (+3% cc); lower than expected from cost efficiencies & investment shift to Q4
    • EPS $3.46; +18% (+19% cc); revenue $70.1B; +13% (+15% cc)
    • Free cash flow $20.3B; CFO $37B (+16%); reflects strong cloud billings & collections
    • Returned $9.7B to shareholders (+15% YoY) via dividends & buybacks
    • Annuity mix 98%; supports revenue durability

  2. Azure growth drivers: non-AI strength plus AI tailwind; robust Q4 outlook

    • Intelligent Cloud revenue $26.8B; +21% (+22% cc); ahead of expectations driven by Azure
    • Azure & other cloud services +33% (+35% cc); includes 16 points from AI services (Q3)
    • Non-AI services outperformed vs plan; accelerated growth in enterprise segment; improved scale motions
    • AI capacity brought online faster than expected in Q3; supported upside delivery
    • Q4: Azure revenue growth guided 34%–35% cc; demand strong across portfolio
    • Q4: non-AI services expected to continue healthy growth; AI demand growing a bit faster than capacity; some AI capacity constraints beyond June
    • Q&A: Management emphasizes increasing inseparability of AI and non-AI workloads; stronger relationship as AI adoption rises
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  1. Microsoft Cloud & AI scale and growth inflection

    • Microsoft Cloud revenue $38.9B, up 22% (Q1 FY25)
    • Company AI business on track to surpass $10B annual revenue run rate in Q2; fastest business in company history to reach this milestone
    • Azure took share in the quarter; continued growth in cloud migration
    • AI transforming work across roles; driving operating leverage
    • Azure and other cloud services revenue up 33% CC (Q1); ~12 pts from AI services, similar to prior quarter
    • Expect Azure Q2 CC growth 31%–32%; H2 acceleration vs H1 as AI capacity increases
    • Commercial bookings up 30% (23% CC); strength in long-term commitments
    • Commercial RPO $259B, up 22% (21% CC); ~40% recognizable next 12 months, up 17% YoY; remainder beyond 12 months up 27%
    • Annuity mix increased to 98% (Q1)
    • Expect another quarter of operating margin expansion in Q2

  2. Azure demand, capacity expansion, and share gains

    • Azure took share; healthy consumption trends in line with expectations (Q1)
    • Azure Arc customers >39,000; up >80% YoY; across industries
    • Data centers in 60+ regions; new cloud & AI infra investments announced in Brazil, Italy, Mexico, Sweden
    • Broadest selection of AI accelerators; first-party Maia 100 plus latest AMD/NVIDIA GPUs; first cloud to bring up NVIDIA Blackwell system with GB200-powered AI servers
    • Non-AI Azure growth trends in line with expectations across regions; sequentially lower non-AI contribution by ~1 pt
    • Demand higher than available capacity; some Q2 AI capacity shifted out; supply pushouts mainly into H2 (Q3)
    • Expect to add more sequential dollars to Azure in Q2 than any other quarter in history; H2 acceleration as capacity ramps
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  1. Record quarter driven by Microsoft Cloud

    • Q2 revenue $62B; up 18% (16% cc); EPS $2.93; up 26% (23% cc)
    • Microsoft Cloud revenue $33.7B; up 24% (22% cc); ahead of expectations
    • Company gross margin % increased to 68%; excluding useful life change +~2 pts
    • Operating margin ~44%; +~5 pts YoY; +~6 pts ex useful life change
    • Headcount at end of Dec down 2% YoY; operating leverage maintained
    • Cash from operations $18.9B; up 69%; free cash flow $9.1B; up 86%
    • Returned $8.4B to shareholders via dividends and buybacks

  2. Azure growth and AI demand momentum

    • Azure took share; AI advantage cited; top performance for training/inference; diverse accelerators incl. AMD, NVIDIA, Azure Maia
    • 53,000 Azure AI customers; >1/3 new to Azure in past 12 months
    • Over half of Fortune 500 use Azure OpenAI; examples: Ally Financial, Coca-Cola, Rockwell Automation
    • Support added for OpenAI latest models: GPT-4 Turbo, GPT-4 with Vision, DALL-E 3; fine-tuning
    • Walmart using Azure OpenAI to streamline >50k associates’ work; transform millions of customers’ shopping
    • Increase in number of $1B+ Azure commitments; Vodafone $1.5B over 10 years
    • Intelligent Cloud revenue $25.9B; up 20% (19% cc); Azure and other cloud services +30% (28% cc), incl. 6 pts from AI services
    • Q&A: Majority of Azure AI usage is inferencing; optimization-only period has ended; continuous cycle of new workloads and optimization
    • Capacity scaling on track; capex acceleration to add capacity; use of third-party capacity where helpful
    • Guidance: In Q3, Azure constant-currency growth expected to remain stable vs stronger-than-expected Q2, driven by consumption with continued strong AI contribution
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