Microsoft posts strong AI-led growth as heavy capex continues
In Q2, Microsoft’s revenue increased 17% year-on-year to $81.3 billion, while its net profit in the quarter surged to $38.5 billion, up 60% from the year-ago period.
Tech giant Microsoft reported a strong jump in revenue and profit in its fiscal second quarter of 2026, driven by AI momentum across its cloud business, as the tech giant continues to invest heavily in capital expenditure.
“We are in the beginning phases of AI diffusion… even in these early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build,” Microsoft Chairman and CEO Satya Nadella said during the company’s second quarter (Q2) earnings call.
During the quarter, the Windows maker’s revenue increased 17% year-on-year to $81.3 billion, while its net profit surged to $38.5 billion, up 60% compared to the year-ago period.
AI and 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.
In Q2, Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% YoY.
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 for region-specific models, including Mistral and Cohere, as more customers look for sovereign AI choices,” Nadella said, adding, “we continue to invest in our first-party models.”
The windows maker’s capital expenditure (capex) rose 66% to $37.5 billion in Q2, with around two-thirds spent on short-lived assets, mainly GPUs and CPUs, as demand continued to exceed supply and Microsoft balanced expanding Azure capacity with rising internal AI use, higher R&D investment and infrastructure replacement, explained Amy Hood, Executive Vice President and Chief Financial Officer of Microsoft.
Microsoft’s peers Google, Meta, and Amazon have also sharply increased capital spending to expand server and data centre capacity, as AI-driven growth accelerates and computing demand rises, even as concerns over a potential AI bubble persist. Meta said its capital expenditure is expected to increase by at least 60% in 2026 from $72.22 billion in 2025.
Hood said capital expenditure is expected to fall sequentially due to normal variability in cloud infrastructure buildouts and the timing of finance lease deliveries.
The Microsoft chief noted that the key to “long term competitiveness” is shaping the firm’s infrastructure to support new high-scale workloads. He added that the key metric Microsoft is optimising for is tokens per watt per dollar.
At the silicon layer, Microsoft has NVIDIA and AMD, and its own Maia chips, delivering the best all-up fleet performance, cost, and supply across multiple generations of hardware, Nadella said, quickly mentioning the newly launched Maia 200 accelerator.
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 $34.1 billion in revenue in the second quarter, up 16% YoY.
Revenue for intelligent cloud, which includes the Azure cloud computing platform, rose 29% to $32.9 billion in the December-ended quarter. Azure and other cloud services revenue increased 39%, the company said.
More personal computing, which includes Windows OEM, Devices, Xbox content and services, search, and news advertising, was down 3% during Q2, clocking a revenue of $14.2 billion.
Revenue from Microsoft’s business and employment-oriented online service, LinkedIn, which has nearly 1.3 billion members, increased 11%, driven by marketing solutions.
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 saw record PC player engagement, and paid streaming hours on Xbox.
Outlook
Hood said that at current rates, foreign exchange is expected to add three percentage points to total revenue growth. Microsoft forecast revenue of $80.65 billion to $81.75 billion, representing growth of 15% to 17%, driven by continued strength in its commercial businesses, partly offset by weaker consumer segments.
Excluding any impact from its investments in OpenAI, other income and expense is expected to be roughly $700 million, she added.
In October, 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.
Edited by Megha Reddy