Microsoft Q1 FY2026 Earnings Conference Call

Summary

Microsoft delivered exceptional Q1 FY2026 results with total revenue of $77.7 billion (up 18%) and Microsoft Cloud revenue of $49.1 billion (up 26%). The standout metric was commercial bookings growth of 112%, driven significantly by Azure commitments from OpenAI and continued growth in $100 million+ contracts. The company announced a new definitive agreement with OpenAI featuring an additional $250 billion in Azure commitments, extending their partnership through 2030-2032 with continued revenue sharing and IP rights. CEO Satya Nadella emphasized Microsoft's strategy of building a 'planet-scale AI factory' with fungible, continuously modernized infrastructure spanning global data centers. The company plans to increase AI capacity by over 80% this year and double its data center footprint over the next two years, with capital expenditures of $34.9 billion in Q1 alone. Microsoft 365 Copilot adoption is accelerating rapidly with 150 million monthly active users across AI features, while GitHub Copilot reached 26 million users as the leading AI coding assistant. Azure revenue grew 40% in constant currency but remains capacity constrained through at least the end of the fiscal year due to overwhelming demand exceeding supply across all AI workloads. The company is prioritizing capacity allocation for first-party applications, R&D investments, and core Azure services while maintaining a balanced approach between enterprise and digital native customers to mitigate concentration risks.

Key Points

• Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year
• Commercial RPO increased over 50% to nearly $400 billion with 2-year weighted average duration
• Commercial bookings increased 112% significantly ahead of expectations
• Azure revenue grew 40% in constant currency, continuing to take market share
• Microsoft 365 Copilot adoption accelerating with 150 million monthly active users across AI features
• GitHub Copilot reached over 26 million users, most popular AI pair programmer
• Capital expenditures were $34.9 billion driven by growing Cloud and AI demand
• New definitive agreement with OpenAI announced with $250 billion additional Azure commitments
• Company will be capacity constrained through at least end of fiscal year due to strong demand
• AI capacity to increase over 80% this year with data center footprint doubling over next 2 years

Action Items

• Continue accelerating data center capacity build-out to meet growing AI demand
• Increase investments in AI talent and compute capacity across product teams
• Deploy new AI data center in Fairwater, Wisconsin going online next year
• Expand Azure AI Foundry platform and multi-agent framework capabilities
• Scale Microsoft 365 Copilot deployment across enterprise customers
• Modernize server fleet with continuous GPU/CPU upgrades and efficiency improvements

Decisions

• Closed new definitive agreement with OpenAI extending partnership through 2030-2032
• Increased FY26 capital expenditure growth rate expectations higher than FY25
• Will remain capacity constrained through at least end of fiscal year
• Prioritize capacity allocation for first-party applications, R&D, and core Azure services
• Continue balanced approach between third-party and first-party AI workloads

Participants