Microsoft’s AI-fuelled cloud engine steers first quarter earnings

Tech giant Microsoft witnessed a “very strong start” to its financial year 2026, Chairman and CEO Satya Nadella noted, highlighting that the company is “building a planet-scale cloud and AI factory”.

Nadella’s remarks came during the company’s first quarter (Q1) earnings call as it showed strong top-line and bottom-line growth driven by AI-powered momentum across its cloud services.

In Q1, the Windows maker’s revenue increased 18% year-on-year to $77.7 billion. Its net profit in the quarter surged to $27.7 billion, up 12% from the year-ago period.

Cloud boost

Cloud is the primary driver of Microsoft’s revenue and growth. Under the Microsoft Cloud umbrella, Azure leads the way, supported by services such as Microsoft 365, Dynamics 365, and other cloud-based offerings. 

Microsoft Cloud revenue grew 26% YoY to $49.1 billion in the quarter.

The integration of OpenAI technologies, including Azure OpenAI and Copilot, has created a powerful AI-cloud growth loop, with AI workloads running on Azure and fuelling cloud demand.

“We are seeing increasing demand and diffusion of our AI platform and family of Copilots, which is fuelling our investments across both capital and talent,” Nadella said.

The firm’s capital expenditure (capex) rose 74% to $34.9 billion in Q1, driven by strong demand for Microsoft’s cloud and AI offerings. About half of this spend went to short-lived assets—mainly GPUs and CPUs—supporting Azure platform growth, first-party applications, AI solutions, R&D acceleration, and the replacement of end-of-life servers and networking equipment.

Like many of its Big Tech peers, Google and Meta, Microsoft sees its capex increasing in the near future.

“With accelerating demand and a growing RPO balance, we’re increasing our spend on GPUs and CPUs. Therefore, total spend will increase sequentially, and we now expect the FY26 growth rate to be higher than FY25,” noted Amy Hood, Executive Vice President and Chief Financial Officer of Microsoft.

AI models

Nadella pointed out that the company will increase its total AI capacity by over 80% this year, and roughly double its total datacentre footprint over the next two years.

Speaking about its first party models, Nadella said the company is “excited by the performance” of its new MAI models for text, voice, and image generation.

Earlier this month, Microsoft introduced MAI-Image-1, its first text-to-image generation model developed entirely in-house, signalling its effort to increase its own AI capabilities.

The Microsoft chief noted that the company now has 900 million monthly active users of its AI features across its products.

Growth across segments

The Redmond-headquartered firm broadly categorises its revenue under three segments: productivity and business processes, intelligent cloud, and more personal computing. 

Microsoft’s productivity and business processes clocked $33 billion in revenue in the first quarter, up 17% YoY.

Revenue for intelligent cloud, which includes the Azure cloud computing platform, rose 28% to $30.9 billion in the September-ended quarter. The company’s Azure, and other cloud services revenue grew 40%.

More personal computing, which includes Windows OEM, Devices, Xbox content and services, search, and news advertising, was up 4% during Q1, clocking a revenue of $13.8 billion.

Revenue from Microsoft’s business and employment-oriented online service, LinkedIn, which has nearly 1.3 billion members, increased 10%, driven by marketing solutions. The talent solutions business was impacted by continued weakness in the hiring market, noted Hood.

Gaming remains a strategic priority for Microsoft, which has expanded its presence in the sector through major investments and innovation. 

In recent years, the company has strengthened its gaming ecosystem with the launch of next-generation Xbox consoles, the growth of its Game Pass subscription service, and the expansion of cloud gaming via Xbox Cloud Gaming. 

Nadella highlighted Microsoft’s continued expansion “across every platform and endpoint” in gaming, emphasising the company’s focus on high-margin content and services. 

Microsoft achieved an all-time high of 155 million monthly active users on Minecraft, and recorded its strongest-ever quarterly revenue from gaming content and services. Nadella said the company saw a strong reception to the recent Xbox Ally launch, along with record engagement from PC players.

Microsoft returned $10.7 billion to shareholders in the form of dividends and share repurchases in the first quarter of fiscal year 2026.

Outlook

Hood said foreign exchange rates are expected to add about two points to total revenue growth and one point to growth in cost of goods sold (COGS) and operating expenses. 

Microsoft forecasts revenue of $79.5 billion to $80.6 billion, up 14%–16%, with COGS of $26.35 billion to $26.55 billion (up 21%–22%) and operating expenses of $17.3 billion to $17.4 billion (up 7%–8%).

“The combination of OpenAI’s conversion to a public benefit corp and the ongoing nature of our partnership will result in increased volatility. Therefore, going forward, we will provide our outlook excluding any impact from our investments in OpenAI,” Hood remarked.

She added that, for Q2, other income and expense is expected to be around $100 million, as interest income is projected to more than offset interest expense.

Earlier this week, OpenAI restructured its business, converting its for-profit arm into a public benefit corporation as part of a new agreement that reshapes its long-running partnership with Microsoft.

Under the deal, Microsoft now holds an approximately 27% stake in the reorganised entity, valued at about $135 billion on an as-converted diluted basis.