Microsoft Earnings Summary - October 2026

Key Takeaways

• Microsoft's revenue rose 19% year-on-year to $92.28 billion.
• Azure cloud revenue grew 48% year-on-year, reaching $33.17 billion.
• Capital expenditures (CAPEX) doubled to $39.37 billion, impacting free cash flow (FCF).

Financial Performance

Microsoft reported a strong quarter, significantly exceeding market expectations. The company's revenue increased by 19% compared to the previous year, amounting to $92.28 billion, surpassing the anticipated $91 billion. Operating profit also saw a rise of 21% year-on-year, reaching $4.92 billion. Adjusted earnings per share (EPS) rose by 18% to $4.89, exceeding the expected $4.72. Additionally, the operating margin improved from approximately 48.9% to 49.8%.

Cloud Segment Performance

The Azure cloud segment was a standout performer, achieving a remarkable growth rate of 48% year-on-year, with revenues hitting $33.17 billion. This growth was a key factor in the positive market reaction, as management had previously projected a growth rate of around 45% at constant currency.

Capital Expenditures and Free Cash Flow

On the downside, Microsoft faced challenges with capital expenditures, which surged by 103% year-on-year to $39.37 billion. This increase contributed to a decline in free cash flow to $18.63 billion, resulting in a drop in FCF coverage of net income to 51%, down from 92% the previous year.

Accounting Policy Changes

In a significant move, Microsoft revised its accounting policy, extending the estimated useful life of data centers and buildings from 15 to 25 years. This change allows for a shift of certain future agreements from finance leases to operating leases, effectively reducing reported CAPEX without a corresponding decrease in actual investment. Consequently, the company adjusted its 2026 spending outlook to approximately $175 billion.

Market Reactions and Future Outlook

Prior to the earnings call, Microsoft offered voluntary buyouts to 60,000 employees, indicating proactive management of margins in response to rising capital expenditures. While the Azure segment's growth and efficiency improvements are promising, concerns remain regarding the diminishing value for shareholders due to the scale of investments. For now, the market appears satisfied with the cloud growth exceeding optimistic expectations, but questions about shareholder returns may resurface in future earnings calls.