“We are only at the beginning phases of AI diffusion & already Microsoft has built an AI business that is larger than some of our biggest franchises.”
CEO Satya Nadella captures Microsoft’s Q2 FY2026 earnings in a sentence. The company beat expectations across revenue ($81.3b, up 17%), earnings per share ($4.14 adjusted vs $3.97 expected), & Azure growth (39%). Yet the stock fell 11% after earnings.
“We now expect to be capacity constrained through at least the end of our fiscal year, with demand exceeding current infrastructure build-out.”
CFO Amy Hood said demand is outpacing Microsoft’s ability to build. Azure grew 39%, a slight deceleration from Q1’s 40%, not because demand softened but because Microsoft ran out of capacity to sell. That’s a remarkable constraint for a business generating $32.9b in quarterly revenue.
“Over 250 customers are on track to process over 1 trillion tokens on Foundry this year.”
At a blended average of ~$5 per million tokens across Azure OpenAI models, 1 trillion tokens represents roughly $5b in annual revenue.
“We have 900 million monthly active users of our AI features across our products. There are over 150 million monthly active users of first-party Copilots.”
GitHub Copilot charges $10-20/month. Microsoft 365 Copilot charges $30/month. Even 150 million users generates only $4.5b-6b annually. Microsoft Cloud revenue crossed $51b in Q2, up 26%, so AI-specific revenue remains a fraction of the total.
| Cloud | Operating Margin |
|---|---|
| Azure | 44% |
| AWS | 38% |
| GCP | 17% |
The business generates $38.3b in operating income, up 21%. Margins can absorb the CapEx for now.
Microsoft spent $37.5b in Q2 FY2026 on CapEx, up from $34.9b the prior quarter & $34.2b at Amazon. That spending is accelerating. Each of the three major hyperscalers projects roughly $150b in annual spending, with Meta not far behind at $115-135b for 2026. This very healthy business provides the capital to continue growing.
“Already, we have roughly 10x’d our investment, & OpenAI has contracted an incremental $250b of Azure services … Approximately 45% of our commercial RPO balance is from OpenAI.”
Microsoft’s commercial remaining performance obligation surged 110% to $625b in Q2, with an average duration of two and a half years. Hood’s disclosure means $281b comes from a single customer. That’s substantial risk.
Microsoft’s strength continues to demonstrate two things : insatiable demand for inference & increasing customer concentration risk for even the largest businesses in the world.
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