Microsoft cloud revenue hits $49.1 billion as AI investments accelerate

Microsoft announced financial results for the first quarter of fiscal year 2026 on October 29, 2025, showing revenue of $77.7 billion and an 18% increase compared to the corresponding period of the previous fiscal year. The Redmond-based technology company reported operating income of $38.0 billion, representing a 24% increase year-over-year.

Net income reached $27.7 billion on a GAAP basis, marking a 12% increase. On a non-GAAP basis, which excludes the impact from investments in OpenAI, net income reached $30.8 billion and increased 22%. The OpenAI investments resulted in a decrease in net income of $3.1 billion and a decrease in diluted earnings per share of $0.41 for the quarter.

Diluted earnings per share stood at $3.72 on a GAAP basis, increasing 13%, while non-GAAP diluted earnings per share reached $4.13, up 23%. According to the press release, all growth comparisons relate to the corresponding period in fiscal year 2025.

Cloud infrastructure drives growth

Microsoft Cloud revenue surpassed $49.1 billion and increased 26% in the quarter. According to the press release, commercial remaining performance obligation increased 51% to $392 billion, with a weighted average duration of two years.

The Intelligent Cloud segment generated revenue of $30.9 billion, representing a 28% increase year-over-year. Azure and other cloud services revenue increased 40% in the quarter. According to the financial statements, the Intelligent Cloud segment's cost of revenue reached $12.3 billion, while operating income stood at $13.4 billion.

"Our planet-scale cloud and AI factory, together with Copilots across high value domains, is driving broad diffusion and real-world impact," according to Satya Nadella, chairman and chief executive officer of Microsoft, in the press release. "It's why we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead."

During the earnings conference call, Nadella disclosed that the company announced closing a new definitive agreement with OpenAI. According to the transcript, Microsoft has roughly 10 times its investment, OpenAI has contracted an incremental $250 billion of Azure services, and revenue share, exclusive IP rights and API exclusivity for Azure continue until AGI or through 2030. The model and product IP rights extend through 2032.

Datacenter expansion reaches unprecedented scale

The company disclosed plans to increase total AI capacity by over 80% during fiscal year 2026 and roughly double total datacenter footprint over the next two years, according to the earnings call transcript. Nadella announced that the company will bring online Fairwater in Wisconsin, described as the world's most powerful AI datacenter, which will scale to two gigawatts.

According to the transcript, Microsoft deployed the world's first large scale cluster of NVIDIA GB300s during the quarter. The company stated it is building a fungible fleet that spans all stages of the AI lifecycle, from pre-training to post-training, to synthetic data generation and inference.

During the quarter, Microsoft increased the token throughput for GPT-4.1 and GPT-5 by over 30% per GPU, according to Nadella's remarks in the transcript. Azure customers in 33 countries are developing cloud and AI capabilities within their borders to meet local data residency requirements.

The company reported capital expenditures of $34.9 billion for the quarter, compared to $20.0 billion in the same period of the previous fiscal year. According to the cash flow statement, this represents additions to property and equipment, including assets acquired under capital leases.

Commercial momentum accelerates

Commercial bookings growth reached 112% in constant currency for the quarter, according to the investor metrics document. The metric reflects the commercial portion of LinkedIn and shows significant acceleration from the 38% growth recorded in the full fiscal year 2025.

The Productivity and Business Processes segment generated revenue of $33.0 billion, increasing 17% year-over-year. Microsoft 365 Commercial cloud revenue increased 17%, while Microsoft 365 Consumer cloud revenue increased 26%, according to the press release.

According to the investor metrics, Microsoft 365 Commercial seat growth reached 6% year-over-year, while the commercial portion saw revenue growth of 17% in constant currency. LinkedIn revenue increased 10%, while Dynamics 365 revenue increased 18% for the quarter.

"We delivered a strong start to the fiscal year, exceeding expectations across revenue, operating income, and earnings per share," according to Amy Hood, executive vice president and chief financial officer of Microsoft, in the press release. "Continued strength in the Microsoft Cloud reflects the growing customer demand for our differentiated platform."

The commercial remaining performance obligation of $392 billion represents contracted future revenue. According to the balance sheet, short-term unearned revenue stood at $59.0 billion at September 30, 2025, compared to $64.6 billion at June 30, 2025.

Copilot adoption gains traction

Microsoft reported 900 million monthly active users of AI features across its products, according to the earnings call transcript. The first party family of Copilots surpassed 150 million monthly active users across information work, coding, security, science, health, and consumer applications.

According to Nadella's remarks, tens of millions of users across the Microsoft 365 customer base are using Chat, with adoption accelerating rapidly and growing 50% quarter over quarter. More than 90% of the Fortune 500 now use Microsoft 365 Copilot.

Accenture, Bristol Myers Squibb, EY Global, and the UK's tax, payment and customs authority all purchased over 15,000 seats during the quarter, according to the transcript. Lloyds Banking Group deployed 30,000 seats. PwC added 155,000 seats during the quarter and now has over 200,000 deployed across its global operations.

According to the transcript, PwC employees interacted with Microsoft 365 Copilot over 30 million times in six months. GitHub Copilot reached over 26 million users, with GitHub adding a developer every second and reaching over 180 million developers on the platform.

Azure AI Foundry reported 80,000 customers, including 80% of the Fortune 500, according to the transcript. The platform offers developers and enterprises access to over 11,000 models, including OpenAI's GPT-5 and xAI's Grok 4.

Segment performance analysis

The More Personal Computing segment generated revenue of $13.8 billion, increasing 4% year-over-year. Windows OEM and Devices revenue increased 6%, while Xbox content and services revenue increased 1%, according to the press release.

Search and news advertising revenue excluding traffic acquisition costs increased 16% for the quarter. According to the segment results, the More Personal Computing segment's operating income reached $4.2 billion, compared to $3.5 billion in the prior year period.

The income statement shows total cost of revenue of $24.0 billion for the quarter, compared to $20.1 billion in the corresponding period of fiscal year 2025. Operating expenses, comprising research and development, sales and marketing, and general and administrative costs, totaled $15.7 billion.

Research and development expenses reached $8.1 billion, increasing from $7.5 billion year-over-year. Sales and marketing expenses stood at $5.7 billion, unchanged from the prior year period. General and administrative expenses reached $1.8 billion, compared to $1.7 billion in the corresponding quarter.

Financial position strengthens

The balance sheet shows total assets of $636.4 billion at September 30, 2025, compared to $619.0 billion at June 30, 2025. Cash, cash equivalents, and short-term investments totaled $102.0 billion, up from $94.6 billion at the end of the previous fiscal year.

Property and equipment, net of accumulated depreciation, reached $230.9 billion, compared to $205.0 billion at June 30, 2025. The increase reflects the company's substantial infrastructure investments to support AI and cloud services expansion.

According to the cash flow statement, net cash from operations totaled $45.1 billion for the quarter, compared to $34.2 billion in the prior year period. The company returned $10.7 billion to shareholders in the form of dividends and share repurchases during the quarter.

Total liabilities stood at $273.3 billion at September 30, 2025. Long-term debt decreased to $35.4 billion from $40.2 billion at the end of fiscal year 2025. Stockholders' equity reached $363.1 billion, compared to $343.5 billion at June 30, 2025.

Microsoft's gross margin percentage reached 69%, compared to 69% in the same quarter of the previous fiscal year, according to the income statement calculations. Operating margin expanded to 49% from 47% year-over-year.

Advertising revenue maintains growth trajectory

Search and news advertising revenue excluding traffic acquisition costs increased 16% for the quarter, according to the press release. This metric, which removes payments to Bing Ads network publishers and news partners, provides a direct measure of Microsoft's advertising income generated through its search properties.

The growth rate represents a deceleration from the 21% expansion rates recorded throughout fiscal year 2025. According to the investor metrics document, search and news advertising revenue excluding traffic acquisition costs grew 18% in the first quarter of fiscal 2025, accelerated to 21% in both the second and third quarters, and maintained 21% growth in the fourth quarter before moderating to 16% in the current period.

The More Personal Computing segment, which houses the search and advertising business, generated total revenue of $13.8 billion for the quarter. Operating income for this segment reached $4.2 billion, compared to $3.5 billion in the prior year period, according to the segment results. The 18% increase in operating income exceeded the 4% overall revenue growth for the segment, indicating improved profitability in the advertising business.

During the earnings call, Nadella stated that Edge has taken share for 18 consecutive quarters. According to the transcript, Bing took share again in search during the quarter. Daily users of the Copilot consumer app increased nearly 50% quarter over quarter.

The advertising performance occurs within Microsoft's broader AI integration strategy. According to the transcript, overview pages in Bing now include embedded conversational capabilities. Edge introduced AI features to automate multi-step workflows within the browser and help users continue from where they left off.

Copilot advertising integration advances

Microsoft deployed advertising formats specifically designed for Copilot experiences during fiscal year 2025. These placements appear below organic Copilot responses with conversational summaries explaining relevance to user queries, creating separation between organic and sponsored content while maintaining contextual connection.

The company has not disclosed specific revenue contributions from Copilot-integrated advertising formats in the quarterly results. However, the search and news advertising growth of 16% encompasses both traditional search advertising and newer AI-integrated placements across the expanding Copilot surface area.

According to the transcript, Copilot provides a voice-first, immersive experience across PC, mobile, and Xbox. Windows 11 PCs now function as AI PCs with Copilot integration. The company introduced capabilities allowing users to speak naturally to computers, including a Copilot wake word, with Vision enabling real-time conversations about on-screen content.

The advertising business benefits from the 900 million monthly active users of AI features across Microsoft's products, according to the transcript. This user base provides substantial inventory for advertising placements as Copilot integration expands across the product portfolio.

LinkedIn and gaming advertising streams

LinkedIn revenue increased 10% for the quarter, according to the press release. The professional networking platform contributes to Microsoft's overall advertising revenue through its Marketing Solutions business, though the company does not separately disclose LinkedIn's advertising-specific revenue in quarterly results.

According to the investor metrics document, LinkedIn revenue grew 10% in constant currency during the quarter. The platform had generated $17.8 billion in revenue for full fiscal year 2025, making it a substantial component of the Productivity and Business Processes segment.

Xbox content and services revenue increased 1% for the quarter, according to the press release. Gaming platforms provide advertising inventory through in-game placements and related services, though Microsoft does not break out gaming advertising revenue separately in its financial statements.

The transcript mentions that Copilot provides experiences across gaming platforms. Microsoft Casual Games, including titles from King such as Candy Crush, offer advertising inventory that the company markets through its Microsoft Advertising platform for app promotion campaigns.

Forward outlook and guidance

During the earnings call, Hood provided guidance for the second quarter of fiscal year 2026. The company will provide specific forward-looking guidance in connection with the quarterly earnings announcement on the conference call and webcast, according to the press release.

Microsoft disclosed that other expense, net totaled $3.7 billion for the quarter, compared to $283 million in the prior year period. According to the income statement, this item significantly impacted the company's results and includes the losses from investments in OpenAI.

The company's effective tax rate stood at 19.1% for the quarter, calculated from the provision for income taxes of $6.6 billion on income before income taxes of $34.3 billion. This compares to an effective tax rate of 18.5% in the corresponding quarter of fiscal year 2025.

According to the investor metrics document, Microsoft Cloud gross margin percentage reached 68% for the quarter, compared to 71% in the first quarter of fiscal year 2025. The decrease reflects the substantial infrastructure investments required to support AI services expansion.

Impact on digital marketing landscape

The substantial growth in Microsoft's cloud and AI infrastructure carries significant implications for the digital marketing and advertising technology sectors. Azure's 40% growth provides the underlying infrastructure for advertising platforms and marketing technology solutions increasingly dependent on AI-powered optimization.

Microsoft's advertising business crossed $20 billion in annual revenue earlier in fiscal year 2025, with search and news advertising revenue growing 16% this quarter. The integration of Copilot across Microsoft's platforms has demonstrated doubled click-through rates and 53% increased purchases when the AI assistant participates in customer journeys.

The company's datacenter expansion directly supports advertising infrastructure. The Fairwater datacenter in Wisconsin, announced in September 2025, will scale to two gigawatts and enable AI training and inference workloads at unprecedented scale. This infrastructure underpins Microsoft's advertising products and the Azure services used by marketing technology vendors.

The restructured OpenAI partnership, finalized on October 28, 2025, extended IP rights through 2032 and provides temporal certainty for businesses building on Microsoft and OpenAI capabilities. Marketing technology platforms integrating these technologies gain longer-term strategic planning horizons, though the independent AGI verification panel introduces uncertainty when AGI triggers contractual changes.

Commercial bookings growth exceeding 100% indicates accelerating enterprise adoption of Microsoft's cloud platform. For marketing technology vendors and agencies, this expansion signals growing infrastructure support for AI-powered advertising tools. The 51% increase in commercial remaining performance obligation to $392 billion represents contracted future revenue that will flow through Azure and related services over the next two years.

Microsoft 365 Copilot's penetration across 90% of the Fortune 500 establishes AI-powered productivity tools as enterprise standard. The PwC deployment of 200,000 seats and 30 million interactions demonstrates production-scale AI adoption. For B2B marketing platforms, this widespread Copilot usage creates new integration opportunities and changes how enterprise customers discover and evaluate solutions.

The search and news advertising segment's 16% growth, while decelerating from the 21% rates seen in previous quarters throughout fiscal 2025, maintains momentum as Copilot integration matures. DoubleVerify's October 2025 expansion of measurement capabilities for Microsoft Advertising inventory, including Audience ads across Microsoft properties, reflects third-party verification providers adapting to Microsoft's evolving advertising infrastructure.

However, Microsoft faces regulatory scrutiny, with the Australian Competition and Consumer Commission initiating Federal Court proceedings on October 27, 2025, alleging the company misled approximately 2.7 million Australian customers about subscription options following Copilot integration into Microsoft 365 plans. This legal action highlights potential friction points as Microsoft integrates AI capabilities across its product portfolio at higher price points.

The substantial capital expenditure of $34.9 billion in a single quarter, representing a 75% increase year-over-year, demonstrates Microsoft's commitment to AI infrastructure despite near-term margin pressures. The decrease in Microsoft Cloud gross margin percentage from 71% to 68% reflects the cost of this capacity expansion. For advertising technology companies, this infrastructure investment signals Microsoft's long-term platform commitment but also indicates potential pricing pressures as competitors make similar investments.

GitHub's growth to 180 million developers and Copilot's 26 million users creates a substantial technical audience for developer-focused advertising and marketing. The platform's velocity of adding a developer every second represents rapid expansion of a high-value audience segment. Marketing technology companies targeting developer audiences gain access to an expanding addressable market through Microsoft's ecosystem.

The Azure AI Foundry's 80,000 customers, including 80% of the Fortune 500, and access to 11,000 models establishes Microsoft's platform as infrastructure for enterprise AI applications. Marketing technology vendors building on this foundation gain access to comprehensive model catalogs and enterprise-grade infrastructure, though they also face potential competitive dynamics as Microsoft develops its own application-layer solutions across marketing use cases.

Timeline

• October 28, 2025: Microsoft and OpenAI restructure partnership with new governance framework, extending IP rights through 2032 and introducing independent AGI verification panel
• October 27, 2025: Australian regulator initiates Federal Court proceedings against Microsoft over alleged misleading conduct affecting approximately 2.7 million consumers regarding Copilot subscription integration
• October 29, 2025: Microsoft announces fiscal year 2026 first quarter results with revenue of $77.7 billion, up 18% year-over-year, and Microsoft Cloud revenue of $49.1 billion, up 26%
• October 15, 2025: DoubleVerify expands Microsoft Advertising measurement capabilities with support for Audience ads and DV Campaign Automator for automated campaign trafficking
• September 18, 2025: Microsoft announces Fairwater datacenter in Wisconsin, featuring hundreds of thousands of NVIDIA GB200 GPUs and described as world's most powerful AI datacenter
• August 7, 2025: Elon Musk warns that OpenAI will dominate Microsoft following GPT-5 integration across Copilot and Azure platforms
• July 30, 2025: Microsoft reports fiscal year 2025 fourth quarter results with search and news advertising revenue growing 21% to reach $13.9 billion for the full year
• July 2, 2025: Microsoft details how generative AI reshapes search and advertising, revealing Copilot demonstrates doubled click-through rates and 53% increased purchases
• June 26, 2025: Microsoft Advertising publishes annual trust and safety review detailing removal of over one billion policy-violating advertisements during 2024
• April 30, 2025: Microsoft announces advertising revenue surpassed $20 billion over the last 12 months with search and news advertising revenue growing 21%
• January 29, 2025: Microsoft reports second quarter fiscal 2025 results with search advertising revenue growth accelerating to 21%
• July 31, 2024: Microsoft reports strong fourth quarter fiscal 2024 earnings with Azure growing 29% year-over-year and search advertising revenue increasing 19%

Summary

Who: Microsoft Corporation, led by Chairman and Chief Executive Officer Satya Nadella and Chief Financial Officer Amy Hood, announced financial results affecting shareholders, enterprise customers, developers, and the broader digital advertising and marketing technology ecosystem.

What: Microsoft reported first quarter fiscal year 2026 revenue of $77.7 billion, representing 18% growth year-over-year, with Microsoft Cloud revenue reaching $49.1 billion and increasing 26%. The company disclosed capital expenditures of $34.9 billion, plans to increase AI capacity by over 80% during the fiscal year, and commercial bookings growth exceeding 100% in constant currency. Azure and other cloud services revenue increased 40%, while commercial remaining performance obligation reached $392 billion, up 51%.

When: The financial results cover the three months ended September 30, 2025, representing the first quarter of Microsoft's fiscal year 2026. The company announced these results on October 29, 2025, during an earnings conference call and webcast.

Where: The results reflect Microsoft's global operations, with particular emphasis on Azure datacenter expansion across 33 countries supporting digital sovereignty requirements, the Fairwater datacenter deployment in Wisconsin scaling to two gigawatts, and the deployment of NVIDIA GB300 clusters representing the world's first large-scale implementation of this technology.

Why: The financial performance reflects accelerating enterprise demand for cloud and AI infrastructure, demonstrated through the 51% increase in commercial remaining performance obligation and commercial bookings growth exceeding 100%. Microsoft increased AI capacity investments to meet this demand, deploying unprecedented datacenter infrastructure while expanding the Copilot family to 150 million monthly active users and Azure AI Foundry to 80,000 customers. The restructured OpenAI partnership, finalized October 28, 2025, extended IP rights through 2032 with a $250 billion Azure services commitment, providing strategic certainty for the company's AI platform strategy. For the digital marketing sector, these developments establish Microsoft's infrastructure as foundational for AI-powered advertising and marketing technology, though substantial capital investments created near-term margin pressures with Microsoft Cloud gross margin declining from 71% to 68%.