- Cash Generation: Microsoft generated $18.6 billion after cash capital spending in its September quarter, roughly $10 billion above analyst expectations.
- Cloud Growth: Azure cloud revenue rose 48% year over year to $33.2 billion as Microsoft sold more services from existing computing capacity.
- Delayed Deliveries: Some infrastructure spending shifted into later quarters; Microsoft expects capital expenditure above $50 billion in its fiscal second quarter.
- Profit Growth: Net income rose 32% year over year, while growth excluding OpenAI investment effects was 18%.
Microsoft generated $18.6 billion in free cash flow in the quarter ended September 30, 2026, as cash from operations exceeded payments for property and equipment despite those payments roughly doubling from a year earlier. Stronger cloud collections helped fund its AI infrastructure buildout, while delayed capacity deliveries pushed some spending into later quarters.
The software and cloud company’s fiscal 2027 first-quarter revenue reached $92.3 billion, up 19% from a year earlier. Operating income increased 21% to $45.9 billion. Microsoft released the results October 28.
The free cash flow figure was about $10 billion above analyst expectations, Reuters reported. Shares rose more than 5% in after-hours trading following a second-quarter sales and cloud-growth outlook that also exceeded estimates.
Turning Existing Capacity Into Sales
Azure, Microsoft’s cloud platform for running customer applications and AI workloads, produced $33.2 billion in quarterly revenue. Its 48% year-over-year growth rate accelerated from 42% in the preceding quarter, using Microsoft’s recast comparison figures.
Chief Financial Officer Amy Hood attributed the stronger performance partly to getting more saleable capacity from existing hardware. Engineering improvements freed capacity on graphics processors, or GPUs, for additional customers. Work on general-purpose processors, or CPUs, also let Microsoft sell capacity that had previously been underused.
Hood said revenue from Foundry, the platform developers use to build AI systems, more than tripled from a year earlier. Alongside the extra GPU capacity, Microsoft benefited from higher revenue per token, the units processed by AI models. That gave the company two ways to increase sales: serving more demand with installed hardware and collecting more revenue for the model usage it supplied.
The broader Microsoft Cloud measure reached $63.9 billion, up 30% year over year. That includes business software as well as Azure: Microsoft 365 cloud, its subscription productivity software business, generated $27.8 billion. The company had first passed $50 billion in quarterly cloud revenue in fiscal 2026’s second quarter.
Revenue in the Devices and Consumer segment fell 3% from a year earlier to $15.5 billion.
Cash Covers Investment, With Less Left Over
Cash payments for property and equipment roughly doubled from a year earlier, outpacing growth in operating cash flow and reducing free cash flow from $25.7 billion to $18.6 billion.
Microsoft’s July–September Cash Generation and Investment
| Cash Measure | FY2027 Q1 | FY2026 Q1 |
|---|---|---|
| Operating cash flow | $58.0 | $45.1 |
| Cash additions to property and equipment | $39.4 | $19.4 |
| Free cash flow | $18.6 | $25.7 |
US dollars in billions, rounded. Free cash flow is operating cash flow minus cash additions to property and equipment.
Hood separately reported $45.2 billion in capital expenditure. That measure recognizes the full principal of finance leases when they begin, whereas cash payments occur over time.
Microsoft’s positive cash generation contrasts with Alphabet, which reported negative free cash flow of $9.07 billion for the same July–September period as capital spending increased.
Demand exceeding supply, a large commercial backlog and growth in earnings and revenue supportsa more encouraging assessment of Microsoft’s spending.
Cloud profitability still faced pressure. Microsoft Cloud’s gross margin, the share of sales remaining after their direct costs, was 66%, compared with 68% a year earlier and 65% in the preceding quarter. Hood attributed the year-over-year decline to a greater share of sales coming from Azure, partly offset by improvements in Azure’s own margins.
Broader Demand, With OpenAI Still Material
Chief Executive Satya Nadella identified enterprise applications as a source of longer-lasting cloud demand. He described Unilever using AI agents to automate order-taking and trade-coupon disputes.
Nadella said this kind of enterprise adoption develops over a decade, contrasting it with a few customers buying large amounts of computing capacity each quarter.
OpenAI nevertheless remained a significant revenue source. Microsoft recorded $10 billion in revenue from commercial arrangements with OpenAI, including revenue-sharing payments. That was roughly 11% of total company revenue for the quarter.
Commercial remaining performance obligations, revenue committed under contracts but yet to be recognized, stood at $677 billion. Microsoft expects to recognize roughly 30% over the following 12 months; the contracts have a weighted average duration of about 2.3 years. The total was 73% higher than a year earlier but slightly below the preceding quarter’s $678 billion.
Investment Gains Lift Profit Growth
Net income reached $36.6 billion, up 32% year over year. The comparison benefited from a $207 million gain associated with investments in OpenAI, against a $3.1 billion loss a year earlier.
Excluding those investment effects, Microsoft’s adjusted net income was $36.4 billion, up 18%, and adjusted diluted earnings per share rose to $4.89 from $4.13.
Delayed Spending Moves Into Later Quarters
Microsoft expects second-quarter revenue of $96 billion to $97.1 billion and year-over-year Azure growth of 49% to 50% in constant currency, which removes exchange-rate effects. The sales outlook exceeded the $95.6 billion estimate reported by Reuters from LSEG; Visible Alpha’s Azure growth estimate was 47.6%.
Hood said customer demand still exceeds available supply. Her Azure forecast relies partly on further efficiency improvements to offset third-party GPU capacity deliveries postponed into the second half of the fiscal year.
She expects capital spending above $50 billion in the second quarter and approximately $170 billion for calendar 2026. Spending should accelerate in fiscal 2027’s second half, driven by CPU and GPU investment and postponed third-party capacity deliveries. Higher memory and storage costs are included in the CPU spending outlook. Hood also said Microsoft expects to remain free cash flow positive for fiscal 2027 and would consider additional financing when attractive.
Microsoft also had $364.6 billion in leases, mainly for data centers, that had yet to begin as of September 30. They are scheduled to start between fiscal 2027 and fiscal 2034 and run for one to 20 years, with some arrangements dependent on contractual conditions.
