Q4 FY2026 Results (Quarter Ended June 30, 2026)
- Revenue: $90.01B vs $87.62B expected — beat by +$2.39B (+2.7%) | +18% YoY
- EPS (non-GAAP): $4.74 vs $4.24 expected — beat by 11.8%
- EPS (GAAP): $4.81 (+32% YoY from $3.65)
- Net Income: $35.77B vs $27.23B a year ago (+31% YoY)
- Gross Margin: 67% ($60.5B)
- Operating Income: $40.6B (+18%)
- Free Cash Flow (Q4): $19.6B
- Microsoft Cloud (Q4): $59.3B (+27%)
This is a clean beat across every major line. Revenue, EPS, and cloud all came in above consensus — not marginal beats but meaningful ones. The 11.8% EPS beat on an adjusted basis is the kind of number that gets a stock rerated, which explains the 8.7% AH move on a name that was broadly out of favor YTD.
Strip the Noise: One-Time Items
Before diving into the business, the non-recurring items: Microsoft included a $3.2B gain from its Anthropic investment, plus lower-than-expected costs tied to its voluntary retirement program. Combined, these items contributed $0.27 per share to Q4 EPS. That's roughly $2B-ish in net benefit above operating performance. For context, the GAAP EPS of $4.81 vs $3.65 year-ago represents a 32% increase — but the operating story, adjusting for the Anthropic gain, is still genuinely strong. Xbox also took an impairment charge that partially offset these gains. The point: focus on the operating metrics and the cloud trajectory, not the headline net income.
Azure at $100B — Why This Matters
Azure revenue surpassed $100 billion in annualized revenue for the first time, growing at 41% year-over-year. That's not just a milestone number — it's a signal about enterprise AI adoption velocity. The specific quote from Satya Nadella: Azure Q1 FY2027 guidance is for ~45% growth in constant currency. Growing faster next quarter than the quarter that just closed.
AWS (Amazon's cloud) runs at roughly $110-115B annualized, growing ~17%. Azure is now within striking distance and growing at more than 2x the pace. The gap that looked structural 18 months ago is closing. The driver: enterprise AI workloads running on Azure — specifically OpenAI integration, Copilot Studio, and the broader AI cloud services stack that Microsoft has built around its OpenAI exclusivity. When a Fortune 500 company deploys Microsoft 365 Copilot across 50,000 employees, that inference compute runs on Azure. The product flywheel is working.
One risk embedded in this: Microsoft disclosed that ~45% of its $625 billion commercial remaining performance obligations are tied to OpenAI. That concentration — nearly half of $625B in backlog depending on one relationship — is a vulnerability. If the OpenAI relationship evolves (OpenAI goes independent, raises from other infrastructure providers, or the exclusivity terms change), a meaningful chunk of that backlog thesis changes with it. Deutsche Bank flagged this as "concentration risk" in a recent note. It's worth holding in the back of your head.
Copilot at 30M Seats — The AI Product Story
Microsoft 365 Copilot exceeded 30 million paid seats, with net seat additions more than doubling sequentially. This is the most important product signal in the quarter. Copilot is the AI product that converts Azure cloud spend into Productivity & Business Processes segment revenue — it's not just a chatbot, it's a workflow automation tool embedded into every Office document, Teams meeting, and email workflow at enterprise scale.
The bear case on Microsoft all year has been that AI models would disrupt the Office monopoly rather than extend it — that companies would build their own AI tools rather than pay Microsoft more. The 30M seat number, accelerating sequentially, is the clearest counter-data point. Enterprises are buying Copilot at scale. The existing Microsoft lock-in (Active Directory, Teams, SharePoint, Exchange) is proving to be AI moat, not AI vulnerability.
FY2026 Full Year — The Complete Picture
- Revenue: $331.8B (+18% YoY vs $281.7B)
- Intelligent Cloud (incl. Azure): $137.8B (+29.5% YoY)
- Productivity & Business Processes: $140.0B (+15.9%)
- More Personal Computing: $54.1B (-1.1%)
- Operating Income: $155.2B (+21% YoY)
- Operating Margin: 46.78% — up from 45.62% FY2025
- Net Income: $133.7B (+31% YoY)
- EPS: $17.95 (+31.6%)
- Free Cash Flow: $66.99B
- CapEx: $115.9B — up from $64.6B in FY2025 (+79%)
- Returned to shareholders: $43B (divs + buybacks)
- Commercial RPO: $678B
The CapEx figure deserves attention: $115.9B in FY2026, up from $64.6B in FY2025. Q4 alone was $41B. Microsoft is building AI infrastructure at a pace that would have seemed impossible two years ago. CFO Amy Hood guided FY2027 CapEx above $50B (per quarter, based on the language), which implies an infrastructure commitment of $200B+ annualized. That's not a bet — that's a conviction that AI demand will absorb everything they build.
The accounting change is notable: Microsoft is lengthening the useful life of data center buildings and offices from 15 to 25 years, and will classify more data center leases as operating leases rather than finance leases. This reduces GAAP CapEx and improves FCF optics going forward without changing actual cash spend. It's a legitimate accounting treatment but it will make year-over-year FCF comparisons look better than the underlying cash economics. The underlying economics are still strong — FCF of $67B on $331.8B in revenue is real — but read the footnotes.
Guidance: FY2027 Setup
- Q1 FY2027 Revenue: $89.85–$90.95B (+16–17%)
- Azure Q1: ~45% growth in constant currency (accelerating from 41%)
- FY2027: Double-digit revenue and operating income growth
- Operating margin: Declines less than one point full year
- CapEx FY2027: > $50B
Azure guidance of 45% for Q1 FY2027 is the headline. A company growing a cloud business this large at that pace — with Copilot seat adds accelerating — has a durable earnings story into FY2028. The operating margin guidance (declines <1 point) signals that Satya Nadella believes the AI revenue will more than offset the infrastructure investment costs within the fiscal year.
Valuation
- Price at close (July 29): $390.54 (down 19% YTD)
- AH price: ~$424 (+8.7%)
- TTM PE (at $390): 23.26x
- TTM PE (at $424 AH): ~25.3x
- FCF yield (at $390): ~5.7% (on $67B FCF, ~$2.9T market cap at $390)
- Net Cash: $20.0B
Microsoft at 23x trailing earnings with 18% revenue growth, 47% operating margins, Azure accelerating to 45%, and Copilot at 30M seats is not an expensive stock. The YTD decline was driven by AI disruption fear — fear that ChatGPT and open-source models would undercut Office and Azure. The Q4 results are a data point that says: it didn't happen. If anything, AI is extending Microsoft's moat, not eroding it.
The risk remains the OpenAI concentration and the sheer scale of the CapEx bet. If AI demand doesn't absorb the $200B+ annualized infrastructure build, FCF gets squeezed and the growth story requires a longer timeline. But the evidence as of Q4 — Azure at 41% and accelerating, Copilot at 30M seats — says the demand is there.
Position Framework
- Setup: Post-earnings re-rating of a quality mega-cap that had been sold on AI disruption fears that haven't materialized
- Entry: $390–$420 (current to AH levels) — the stock is pricing in ~23x forward earnings with an Azure acceleration story
- Add zone: $365–$380 if any broad market pullback compresses the open gap
- Trim zone: $470–$490 — toward longer-term price targets as FY2027 numbers confirm
- Target: $460–$500 on 12-month view if Azure sustains 40%+ and Copilot seat adds remain strong
- Invalidation: Azure decelerates below 30% for two consecutive quarters, or OpenAI relationship materially changes (exclusivity ends or OpenAI shifts infra to another provider)
- Time horizon: 12–18 months — FY2027 revenue trajectory resolves the multiple debate
Microsoft went from "at risk from AI" to "winning on AI" in one earnings cycle. At $390–$420, you're buying a business that just crossed $100B in Azure, has 30M Copilot users and accelerating, and is guiding to 45% Azure growth next quarter. The fears that drove it down 19% YTD look, based on today's data, mostly wrong.