〈Earnings〉Microsoft Q4 Results Beat Expectations with Azure Growing 43% and Full-Year Revenue Surpassing $100 Billion for the First Time

Microsoft (Microsoft)(MSFT-US) released its financial results for the fourth quarter of the 2026 fiscal year, ending June 30. Benefiting from continued strong growth in its Azure cloud business, both revenue and profit exceeded market expectations. Notably, Azure's annual revenue surpassed the $100 billion mark for the first time. Following the announcement, Microsoft's after-hours stock price rose approximately 3%.

According to LSEG data, Microsoft's adjusted earnings per share (EPS) for the quarter were $4.74, surpassing the market estimate of $4.24. Revenue reached $90.01 billion, exceeding analysts' expectations of $87.62 billion and representing an approximately 18% year-over-year increase.

In terms of profitability, Microsoft's net income for the quarter was $35.77 billion, or $4.81 per share, higher than the $27.23 billion, or $3.65 per share, recorded in the same period last year.

The company stated that the quarter's profits were supported by a $3.2 billion gain from its investment in AI startup Anthropic and lower-than-expected costs related to its voluntary retirement program. Meanwhile, the Xbox gaming business recorded an asset impairment charge.

As of the market close on June 30, Microsoft's stock price had declined approximately 19% year-to-date, while the S&P 500 index rose about 7% over the same period. Market concerns that generative AI could alter the competitive landscape of the software industry have led to selling pressure on many large software stocks this year.

Additionally, Deutsche Bank recently noted that while Microsoft's partnership with OpenAI offers advantages, it also brings a degree of customer concentration risk, particularly as open-source AI models rise rapidly. In January, Microsoft stated that about 45% of its approximately $625 billion in commercial remaining performance obligations (RPO) were related to OpenAI.

Microsoft Chairman and CEO Satya Nadella has been continuously allocating AI computing resources across products such as Azure, public cloud services, AI model development, and Microsoft 365 Copilot. Given the ongoing limited supply of AI chips, allocating more resources to model training could potentially constrain the computing capacity available to Azure enterprise customers.

Financial results show that commercial remaining performance obligations (RPO) reached $678 billion at the end of the quarter, an 8% increase from the previous quarter. The company noted that new contracts this quarter were primarily from general enterprise customers outside of AI model developers, reflecting continued robust enterprise IT demand.

However, AI infrastructure investments have significantly increased expenses. Microsoft's combined capital expenditures and finance leases for the quarter totaled $41 billion, a 69% year-over-year increase. Free cash flow declined to $19.64 billion, down 23% year-over-year, indicating the company continues to invest heavily in building AI data centers and related infrastructure.

The Intelligent Cloud segment, central to AI growth, generated $39.31 billion in revenue this quarter, a 31.6% year-over-year increase, surpassing StreetAccount analysts' estimate of $38.16 billion.

Within this, Azure cloud platform revenue growth accelerated from the previous quarter's 40% to 43% (43% in constant currency), exceeding analysts' forecasts from CNBC and StreetAccount of 40% to 40.2%.

Microsoft also disclosed for the first time that Azure's full-year revenue for the 2026 fiscal year has surpassed $100 billion, marking a significant milestone. In terms of business scale, Azure still lags behind Amazon's (Amazon.com)(AMZN-US) Amazon Web Services (AWS), but remains ahead of Alphabet's (GOOGL-US) Google Cloud.

The Productivity and Business Processes segment, including Office, Dynamics, and LinkedIn, generated $37.85 billion in quarterly revenue, a 14.3% year-over-year increase, also exceeding the market estimate of $37.19 billion.

Microsoft stated that paid seats for Microsoft 365 Copilot have surpassed 30 million, a significant increase from the over 20 million reported in July, indicating rapid and continued adoption of enterprise generative AI applications.

Meanwhile, the More Personal Computing segment, which includes Windows, Surface, Bing, and Xbox, generated $12.85 billion in quarterly revenue, a 4.4% year-over-year decline, but still exceeded the market estimate of $12.17 billion.

The company noted that Windows licensing and device sales declined by 7%. Market research firm Gartner estimates that global PC shipments declined 4.2% during the same period.

The Xbox business continues to face pressure, with content and services revenue declining 10%. Earlier this month, Microsoft announced layoffs in the Xbox division and the spin-off of four game studios into independent operations to streamline its organizational structure and control costs.

In terms of product strategy, Microsoft launched a more cost-effective AI programming model this quarter, appointed LinkedIn executive Dan Shapero to lead the business platform, and reduced the subscription price for Xbox Game Pass, continuing to strengthen its AI and gaming ecosystem.

Markets will now focus on management's outlook during the earnings call, particularly Azure's future growth rate, the scale of capital expenditures for AI data centers, and the commercialization progress of Microsoft 365 Copilot—these will be key indicators for investors assessing the return on AI investments.