Microsoft just posted a standout December-quarter print, underscoring how generative AI and cloud demand are reshaping the company’s growth profile. Below, we break down the headline numbers, segment performance, and what investors should watch next as the AI investment cycle accelerates.
Key takeaways at a glance
- Revenue: $81.3 billion (+17% YoY).
- EPS (non-GAAP): $4.14 (+24% YoY).
- Microsoft Cloud: $51.5 billion (+26% YoY), now well over half of total revenue.
- Azure & other cloud services: +39% YoY (CC +38%), re-accelerating on AI workloads.
- Cash returns: $12.7 billion in buybacks and dividends during the quarter.
Headline results: top and bottom line outperformance
Microsoft exceeded expectations on both revenue and earnings as AI workloads flowed through Azure and commercial cloud suites. On a GAAP basis, EPS was $5.16, reflecting one-time impacts tied to the company’s OpenAI investments; excluding those items, non-GAAP EPS of $4.14 showcased solid operational leverage from the cloud at scale. Revenue growth of 17% kept Microsoft firmly in double digits despite tough comps, with broad-based strength across enterprise cloud, security, and the Microsoft 365 ecosystem.
Segment-by-segment: where the growth came from
Intelligent Cloud (Azure, server, enterprise services): Revenue surged to $32.9B (+29% YoY), powered by Azure’s 39% growth. AI training and inference, along with data platform attach and security, remained core engines. The step-up in Azure growth versus last quarter’s already-strong pace highlights capacity coming online and robust AI consumption.
Productivity & Business Processes (Microsoft 365, Dynamics, LinkedIn): Segment revenue reached $34.1B (+16% YoY). Microsoft 365 Commercial cloud grew 17%, aided by E5 adoption and early Copilot monetization, while Dynamics 365 rose 19% and LinkedIn gained 11%. The message: AI features are steadily raising ARPU and stickiness across Microsoft’s SaaS estate.
More Personal Computing (Windows, Devices, Search, Xbox): Revenue was $14.3B (-3% YoY). Windows OEM and Devices were roughly flat, Search & news ads ex-TAC climbed 10%, while Xbox content and services declined 5%. This segment remains the smallest growth contributor and the most cyclical, but search monetization and Windows commercial are stabilizers.
Cloud flywheel: AI is scaling from pilot to platform
The Microsoft Cloud surpassed $50B this quarter for the first time, reaching $51.5B (+26%). Under the hood, enterprises are standardizing on Azure for AI training/inference, pulling through data, security, and developer services. Copilot is maturing from headline feature to real usage driver: as organizations deploy Copilot across Microsoft 365 and GitHub, the attach rates deepen and seat tiers move up. Management emphasized that this is still the early innings of AI diffusion, with opportunities across every layer of Microsoft’s stack—from custom silicon and infrastructure to the application tier.
Profitability and operating discipline
Operating income climbed 21% to $38.3B, outpacing revenue growth and signaling strong mix and cost control even amid heavy AI infrastructure investment. The company underscored operating rigor—optimizing datacenter utilization, improving unit economics, and pushing architectural efficiencies—helping to translate hyperscale demand into durable margin expansion over time.
Cash returns and balance-sheet strength
Microsoft returned $12.7B to shareholders through buybacks and dividends—up 32% YoY—while continuing to fund massive AI capex and strategic bets. The balance sheet remains a competitive weapon: it supports multi-year datacenter buildouts, custom silicon, and an expanding partner ecosystem without sacrificing capital returns.
What to watch next
- AI supply vs. demand: Azure’s 39% growth suggests supply is catching up. Watch capacity additions, networking bottlenecks, and memory pricing as AI workloads scale.
- Copilot monetization curve: Seat penetration, usage intensity, and enterprise-wide E5 upgrades will dictate Microsoft 365 growth trajectory through CY2026.
- RPO and long-term commitments: Commercial RPO jumped to $625B (+110%), indicating multi-year cloud/AI commitments. Keep an eye on conversion into revenue as capacity ramps.
- Gaming normalization: With Xbox content slipping this quarter, look for pipeline catalysts and first-party content cadence to re-accelerate engagement.
- Guidance color: Management is providing forward-looking commentary on the earnings call; investors will parse Azure growth brackets, opex cadence, and AI capex intensity for the March quarter and beyond.
Stock reaction and setup
MSFT shares were volatile around the print as investors weighed an earnings beat against elevated AI capex and near-term margin debates. With Azure growth re-accelerating, the debate shifts from “if” to “how fast” AI monetization scales—and whether supply chains and capital intensity keep unit economics attractive. For long-term holders, the quarter reinforces the thesis: AI is adding a durable second engine to Microsoft’s cloud, broadening the company’s economic moat across infrastructure and applications.
Valuation context
Even after a strong multi-year run, Microsoft’s valuation continues to hinge on two levers: high-teens revenue growth sustained by cloud + AI, and operating discipline that offsets the investment cycle. If Azure can keep growth in the high-30s while Copilot deepens the SaaS mix, consensus estimates will likely grind higher. The counter-case: if AI build costs or supply constraints crimp throughput, the multiple may pause until visibility improves.
Bottom line
Microsoft delivered a high-quality quarter anchored by AI-driven cloud demand and early Copilot monetization. With Azure growth re-accelerating and cloud revenue topping $50B in a single quarter, Microsoft has clear momentum into calendar 2026. The near-term focus is balancing hyperscale investment with margin durability—but the strategic direction is intact: Microsoft is becoming the operating system for the AI era.
FAQ
What were Microsoft’s total revenue and EPS for fiscal Q2 2026?
Revenue was $81.3B and non-GAAP EPS was $4.14. GAAP EPS was $5.16 due to investment-related impacts.
How fast did Azure grow?
Azure and other cloud services revenue grew 39%, or 38% in constant currency.
How big is Microsoft’s cloud business now?
Microsoft Cloud revenue reached $51.5B for the quarter, up 26% year over year.
Which segments led growth?
Intelligent Cloud led with +29% revenue growth; Productivity & Business Processes rose 16%, while More Personal Computing declined 3%.
How much capital did Microsoft return to shareholders?
The company returned $12.7B via buybacks and dividends, up 32% YoY.
Disclaimer
This article is for informational and educational purposes only and does not constitute investment advice, an offer, or a solicitation to buy or sell any securities. Financial markets involve risk, including the possible loss of principal. Always conduct your own research and consider consulting a licensed financial advisor before making investment decisions. The author does not hold any obligation to update the information herein.
