Microsoft's FY26 Q2 Revenue Increases 16.7% to $81.27B, Cloud Growth Impresses Amid Rising AI Spending

Microsoft has posted a strong revenue in its fiscal second quarter, even as cloud growth showed early signs of cooling and AI investments continued to pressure margins. The company has reported $81.27 billion in revenue for the quarter ended December 31, up 16.7% year over year and ahead of expectations.

Net income jumped to $38.46 billion, compared to $24.11 billion a year earlier, with adjusted earnings reaching $4.14 per share. Microsoft noted that adjusted figures exclude the impact of its OpenAI investments. Azure and other cloud services revenue grew 39%, down slightly from 40% in the previous quarter.

While still robust, the slowdown reflects how Microsoft’s cloud business is entering a more mature phase. The Intelligent Cloud segment generated $32.91 billion, up nearly 29%, driven largely by Azure infrastructure demand and AI workloads. Meanwhile, Microsoft’s Productivity and Business Processes unit posted $34.12 billion in revenue, growing 16%, supported by Office subscriptions, Dynamics, and LinkedIn.

Additionally, More Personal Computing revenue slipped 3% to $14.25 billion, with disappointing results across Windows, Surface, and Xbox content and services.

A notable highlight this quarter was Microsoft’s commercial remaining performance obligation, which surged to $625 billion, up about 110%. The increase was largely related to OpenAI’s $250 billion cloud commitment, with Microsoft disclosing that 45% of its backlog now relates to OpenAI.

The company also reported $9.97 billion in other income, reflecting a dilution gain following OpenAI’s restructuring into a public-benefit corporation. However, profitability has been a concern, as Microsoft’s gross margin narrowed to just over 68%, its lowest level in three years. That’s mostly because the company ramped up spending on AI infrastructure.

Last but not least, capital expenditures and finance leases climbed to $37.5 billion, a 66% increase, driven by new data centers, specialized AI chips, and external capacity leases. Moreover, Microsoft has also said that it plans to raise prices for commercial Office subscriptions, while continuing to expand its AI and cloud ecosystem through large enterprise partnerships.