Microsoft Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2025

Key Takeaways

  • Positive Sentiment: Microsoft Cloud revenue surpassed $168 billion this fiscal year, up 23%, while Azure annual revenue hit $75 billion with 34% growth driven by record-scale infrastructure and migrations.
  • Positive Sentiment: AI and analytics adoption accelerated, with 100 million Copilot monthly active users, 800 million AI feature users across products, 20 million GitHub Copilot users, plus Microsoft Fabric revenue up 55% and 25 000 customers.
  • Positive Sentiment: Full-year FY25 revenue totaled $281 billion (+15%) and operating income reached $128 billion (+17%), while Q4 revenue of $76.4 billion beat expectations with EPS of $3.65 (+24%).
  • Neutral Sentiment: For FY26, Microsoft guides to another year of double-digit revenue and operating income growth with relatively unchanged operating margins and moderated capital expenditures.
  • Negative Sentiment: Azure AI services remain supply-constrained as demand outpaces data center capacity, prompting over $30 billion in Q1 CapEx and potential short-term mix pressure on gross margins.
AI Generated. May Contain Errors.
Earnings Conference Call
Microsoft Q4 2025
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Greetings, and welcome to the Microsoft Fiscal Year twenty twenty five Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Nielsen, Vice President of Investor Relations.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer Amy Hood, Chief Financial Officer Alex Jolla, Chief Accounting Officer and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non GAAP items.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

The non GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's fourth quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward looking statements, which are predictions, projections or other statements about future events.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factors section of our Form 10 ks, Forms 10 Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward looking statement. And with that, I'll turn the call over to Satya.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Thank you, Jonathan. It was a very strong close to what was a record fiscal year for us. All up Microsoft Cloud surpassed $168,000,000,000 in annual revenue, up 23%. The rate of innovation and the speed of diffusion is unlike anything we have seen. To that end, we are building the most comprehensive suite of AI products and tech stack at massive scale.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And to provide more context, I want to walk up the stack starting with Azure. Azure surpassed $75,000,000,000 in annual revenue, up 34% driven by growth across all workloads. We continue to lead the infrastructure wave and took share every quarter this year. We opened new DCs across six continents and now have over 400 data centers across 70 regions more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi gigawatt data centers.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

We stood up more than two gigawatts of new capacity over the past twelve months alone and we continue to scale our capacity faster than any other competitor. Every Azure region is now AI first. All of our regions can now support liquid cooling, increasing the fungibility and the flexibility of our fleet. And we are driving and riding a set of compounding S curves across silicon systems and models to continuously improve efficiency and performance for our customers. Take for example, GBD4O family of models, which have the highest volume of inference tokens.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago. Beyond the AI fleet, we continue to build our commercial cloud to address customers' unique data residency and sovereignty requirements. This quarter, we introduced the Microsoft Sovereign Cloud, the industry's most comprehensive solution spanning both public and private cloud deployments. All of this innovation is driving our strong results. We saw accelerating growth from migrations again this quarter.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Nestle, for example, migrated more than 200 SAP instances, 10,000 plus servers, 1.2 petabytes of data to Azure with near zero business disruption. That makes it one of the largest and most successful migrations in business history. The next big accelerator in the cloud will be quantum and I'm excited about our progress. In fact, earlier this month, we announced the world's first operational deployment of Level two quantum computer in partnership with Atom Computing. This is how we will continue to think and make investments with decade long arcs while making progress every quarter.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

The next layer is data, which is foundational to every AI application. Microsoft Fabric is becoming the complete data and analytics platform for the AI era, spanning everything from SQL to NoSQL to analytics workloads. It continues to gain momentum with revenue up 55% year over year and over 25,000 customers. It's the fastest growing database product in our history. FabricOnely expands all databases and clouds including semantic models from Power BI and therefore it is the best source of knowledge and grounding for AI applications and context engineering.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Azure Databricks and Snowflake on Azure both accelerated as well. Cosmos DB and Azure PostgreSQL are both powering mission critical workloads at scale. OpenAI for example uses Cosmos DB in the hot path of every chat GPT interactions storing chat history, user profiles and conversational state and Azure PostgreSQL stores metadata critical to the operation of ChatGPT as well as OpenAI's developer APIs. This year, we launched Azure AI Foundry to help customers design, customize and manage AI applications and agents at scale. Foundry features best in class tooling, management, observability and built in controls for trustworthy AI.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Customers increasingly want to use multiple AI models to meet their specific performance, cost and use case requirements. And with Foundry, they can provision inferencing throughput ones and apply it across more models than any other hyperscaler, including models from OpenAI, DeepSeek, Meta, xAI's Grok and very soon Black Forest Labs and Mistral AI. We sim shipped 15 models from OpenAI alone on Foundry this year, providing same day access to state of the art models deeply integrated with our infrastructure and tools. And we are seeing accelerated adoption of our new Foundry agent service, which is now being used by 14,000 customers to build agents that automate complex tasks. For example, NASDAQ is using Foundry to build agents that help customers prepare for board meetings, cutting prep time by up to 25%.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

All up 80% of Fortune five hundred already use Foundry. And when we look narrowly at just the number of tokens served by Foundry APIs, we processed over 500,000,000,000,000 this year, up over 7x. This is a good indicator of true platform diffusion beyond a few head apps and services. Talking about the app layer, these applications are becoming embedded in our daily work and life. Our family of Copilot apps has surpassed 100,000,000 monthly active users across commercial and consumer.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And when you take a broader look at the engagement of AI features across our products, we have over 800,000,000 monthly active users. Microsoft three sixty five Copilot is becoming the new way to organize work and workflow and work artifacts. We rolled out our biggest update to three sixty five Copilot to date this quarter, bringing together chat, search, create notebooks as well as agents into one intuitive scaffolding. With this innovation and continued product improvements, we are seeing real momentum. Customers continue to adopt Copilot at a faster rate than any other new Microsoft three sixty five suite with strong usage intensity as shown by our week over week retention.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And we saw the largest quarter of seat adds since launch with a record number of customers returning to buy more seats. Barclays, for example, will roll out Microsoft three sixty five Copilot to 100,000 employees globally following a successful initial deployment of 15,000. UBS is expanding its deployment to all of its employees after initially rolling it out to 55,000 of them. And Adobe, KPMG, Pfizer, Wells Fargo, purchased over 25,000 seats this quarter. Tens of thousands of organizations have already used our researcher and analyst deep reasoning agents in the first weeks of availability and we have introduced group level agents in teams like facilitator and interpreter, which generate real time translation and notes in meetings.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Hundreds of partners like Adobe, SAP, ServiceNow and Workday have built their own third party agents that integrate with Copilot and Teams. We are also seeing more customers use Copilot Studio to extend Microsoft three sixty five Copilot and build their own agents. This year customers created 3,000,000 agents using SharePoint and Copilot Studio. And with Copilot tuning, they can easily create agents fine tuned on their company's data, workflow and style that reflect their unique tone, language and expertise. We're also seeing great traction among specific roles and functions starting with developers.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

GitHub Copilot continues to have great momentum in IDE with agent mode and new form factors like coding agent, which is capable of asynchronously executing developer tasks. We have 20,000,000 GitHub Copilot users. GitHub Copilot enterprise customers increased 75% quarter over quarter as companies tailor Copilot to their own code basis and 90% of the Fortune 100 now use GitHub Copilot. More broadly, GitHub usage and repos are seeing explosive growth because of AI. AI projects on GitHub more than doubled over the last year.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

The surge in wide coding projects and AI coding agents, whether it is Cloud Code, Codex, Cursor or GitHub Copilot are generating more pull requests and more repos on GitHub. And our code review agent is being used heavily across the platform performing millions of code reviews each month. In healthcare, we had a breakout year for Dragon Co Pilot. Customers used our ambient AI solutions to document over 13,000,000 physician patient encounters this quarter, up nearly 7x year over year. For example, at Mercy Health System, more than 1,000 physicians are already using Copilot to reduce administrative burden so that they can focus on providing better care.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

They have saved more than one hundred thousand hours to date and plan to expand to all 5,000 providers. As one physician put it, the best thing to happen to my practice in ten years. And in security, we were the first in the industry to introduce agents to help defenders autonomously handle high volume security and IT tasks. More broadly, AI is driving a fundamental change in the BizApps market as customers shift from legacy systems to agentic business applications. Dynamics three sixty five took share this year and we are winning customers in every industry like Verizon with sales, Domino's Pizza Group with ERP, one-eight 100 Flowers with contact center.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

When it comes to consumer apps, we are innovating across all surfaces. In fact, on Monday, we introduced Copilot mode in Edge. It's especially exciting to see the innovation coming back to browsers. Copilot mode brings together Copilot Composer, Chat, Discover, Search and Actions to build the next generation of browser for the AI age. Our Copilot consumer app also continued to see strong growth in engagement and successful sessions and we are bringing Copilot to every Windows 11 PC.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

With Copilot Vision, you can share your screen with Copilot and get real time insights and assistance on anything. And we are well positioned as we approach Windows 10 end of support in October, thanks to Windows 11 and Copilot plus PCs, which offer customers compelling security as well as AI value. Talking about security, it underlies our cloud and AI infrastructure as well as our Copilots and agents. We have launched over 100 new capabilities over the past year. Just last week, we added a modern data lake to our SIEM, Microsoft Sentinel, bringing together customer data across our first party tools as well as third party ecosystem over three fifty connectors.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

We're also extending the systems customers already use for governance, identity, security and management to protect every AI agent. Entra now extends identity permissions policies and access controls to agents. Defender secures nearly 2,000,000 general AI apps. Purview is used by three quarters of the Microsoft three sixty five Copilot customers to protect their data. And all up, we now have nearly 1,500,000 security customers and continue to take share across all major categories we serve.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Before I wrap, I want to talk about two consumer businesses of ours with massive end user reach, LinkedIn and Xbox. LinkedIn is home to 1,200,000,000 members with four consecutive years of double digit member growth. All up comments on LinkedIn rose over 30% and video uploads increased over 20% this year. We continue to bring AI to every part of LinkedIn experience introducing agents across hiring as well as sales. When it comes to gaming, we have 500,000,000 monthly active users across platforms and devices.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

We are now the top publisher on both Xbox and PlayStation this quarter with successful launches of Forza Horizon five and Oblivion Remastered. The Call of Duty franchise has never been stronger. 50,000,000 people have played Black Ops six, Total hours surpassed 2,000,000,000. Minecraft saw record monthly active usage and revenue this quarter, thanks in large part to the success of the Minecraft movie. And we have nearly 40 games in development, so much, much more to come.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

We surpassed over 500,000,000 of gameplay stream via the cloud this year and Game Pass annual revenue was nearly $5,000,000,000 for the first time. In closing, we are going through a generational tech shift with AI and I have never been more confident in Microsoft's opportunity to drive long term growth and define what the future looks like. With that, let me turn it over to Amy to walk through our financial results as well as the outlook.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Thank you, Satya, and good afternoon, everyone. This year, we delivered over $281,000,000,000 in revenue, up 15% year over year, which reflects the broad strength of our products and services. Operating income was over $128,000,000,000 up 17% year over year as we invested against the expansive opportunity ahead. And in our largest quarter of the year, we significantly exceeded expectations with strong execution by our sales and partner teams. As Satya shared, we're innovating faster than ever to deliver new value to our customers.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

This quarter revenue was $76,400,000,000 up 1817% in constant currency. Gross margin dollars increased 1615% in constant currency, while operating income increased 2322% in constant currency. And earnings per share was $3.65 an increase of twenty four percent and twenty two percent in constant currency. For the first time commercial bookings were over $100,000,000,000 increasing 3730% in constant currency on a strong prior year comparable. Strong execution across our core annuity sales motions, including healthy renewals as well as an increase in the number of 10,000,000 and $100,000,000 plus contracts for both Azure and Microsoft three sixty five helped drive these results.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Commercial remaining performance obligation increased to $368,000,000,000 up 3735% in constant currency. Roughly 35% will be recognized in revenue in the next twelve months, up 21% year over year. The remaining portion recognized beyond the next twelve months increased 49%. And this quarter our annuity mix was again 98%. FX was roughly in line with expectations on total company revenue, segment level revenue, COGS and operating expense growth.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Microsoft Cloud revenue was $46,700,000,000 ahead of expectations and grew 2725% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 68% down two points year over year from the impact of scaling our AI infrastructure partially offset by continued efficiency gains in Azure and M365 Commercial Cloud. Company gross margin percentage was 69%, down one point year over year driven by sales mix shift to Azure and the lower Microsoft Cloud gross margin noted earlier. Operating expenses increased 65% in constant currency and operating margins increased two points year over year to 45%. Better than expected revenue growth coupled with a focus on operating efficiently drove the margin expansion.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

At a total company level, headcount at the June was relatively unchanged year over year. Now to our segment results. Revenue from Productivity and Business Processes was $33,100,000,000 and grew 1614% in constant currency better than expected driven by M365 Commercial Products and Cloud Services and M365 Consumer Products and Cloud Services. M365 Commercial Cloud revenue was ahead of expectations and increased 1816% in constant currency with two points of benefit from in period revenue recognition. Business trends remained relatively stable to the prior quarter when excluding the in period revenue recognition with ARPU growth again driven by E5 and M365 Co Pilot.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Paid M365 commercial seats grew 6% year over year with installed base expansion across all customer segments though primarily in our small and medium business and frontline worker offerings. M365 Commercial Products revenue increased 97% in constant currency ahead of expectations due to higher than expected Office 2024 transactional purchasing. M365 consumer cloud revenue was better than expected increasing 20% driven by ARPU growth following the January price increase and subscriber growth of 8%. LinkedIn revenue increased nine percent and eight percent in constant currency with growth across all businesses. The Talent Solutions continues to be impacted by weakness in the hiring market.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Dynamics three sixty five revenue increased 2321% in constant currency with strong execution in our core annuity sales motions leading to growth across all workloads. Segment gross margin dollars increased 1615% in constant currency and gross margin percentage increased slightly driven by the efficiency gains noted earlier even as we deliver more AI features across our products and scale our AI infrastructure. Operating expenses increased 76% in constant currency and operating income increased 2119% in constant currency. Next, the Intelligent Cloud segment. Revenue was $29,900,000,000 and grew 2625% in constant currency ahead of expectations driven by Azure and our on premises server business.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

In Azure and other cloud services revenue grew 39% significantly ahead of expectations driven by accelerated growth in our core infrastructure business primarily from our largest customers. As a reminder, new cloud and AI workloads are built and scaled using the breadth of our services. Revenue from Azure AI services was generally in line with expectations. And while we brought additional data center capacity online this quarter demand remains higher than supply. In our on premises server business revenue decreased 23% in constant currency ahead of expectations primarily driven by transactional purchasing which also has higher end period revenue recognition.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Enterprise and Partner Services revenue increased 76% in constant currency with growth in Enterprise Support Services partially offset by a decline in Industry Solutions. Segment gross margin dollars increased 1716% in constant currency and gross margin percentage decreased four points year over year driven by scaling our AI infrastructure, partially offset by Azure efficiency gains noted earlier. Operating expenses increased 64% in constant currency and operating income grew 23%. Now to more personal computing. Revenue was $13,500,000,000 and grew 9% exceeding expectations primarily due to Windows OEM as well as Xbox content and services.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Windows OEM and devices revenue increased 3% year over year ahead of expectations as inventory levels remained elevated. Search and news advertising revenue ex TAC increased 2120% in constant currency driven by continued growth in both volume and revenue per search as well as roughly eight points of favorable impact from third party partnerships including the benefit of a low prior year comparable. And in gaming, revenue increased 10%. Xbox content and services revenue increased 1312% in constant currency driven by better than expected performance from first party content and Xbox Game Pass. Segment gross margin dollars increased 15%.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Gross margin percentage increased three points year over year with improvement across all businesses. Operating expenses increased 43% in constant currency. Operating income increased 3433% in constant currency driven by continued prioritization of higher margin opportunities. Now back to total company results. Capital expenditures were $24,200,000,000 including $6,500,000,000 of finance leases, where we recognized the full value at the time of lease commencement.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Cash paid for PP and E was $17,100,000,000 The difference is primarily due to finance leases. More than half our spend was on long lived assets that will support monetization over the next fifteen years and beyond. The remaining spend was primarily for servers both CPUs and GPUs and driven by strong demand signals. Cash flow from operations was $42,600,000,000 up 15% driven by strong cloud billings and collections partially offset by higher supplier payments. And this quarter free cash flow was $25,600,000,000 Other income and expense was negative $1,700,000,000 primarily due to losses on investments accounted for under the equity method.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Our effective tax rate was approximately 17%. And finally, we returned $9,400,000,000 to shareholders through dividends and share repurchases bringing our total cash return to shareholders to over $37,000,000,000 for the full fiscal year. Now moving to our outlook. My commentary for both the full year and next quarter is on a U. S.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Dollar basis unless specifically noted otherwise. Let me start with some full year commentary for FY 2026. First, FX. Assuming current rates remain stable, we expect FX to increase full year revenue growth and COGS growth by approximately two points and to increase operating expense growth by one point. Next, building on the strong momentum we saw this past year, we expect to deliver another year of double digit revenue and operating income growth in FY 2026.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

We will continue to invest against the expansive opportunity ahead across both capital expenditures and operating expenses given our leadership position in commercial cloud, strong demand signals for our cloud and AI offerings and significant contracted backlog. Capital expenditure growth as we shared last quarter will moderate compared to FY 2025 with a greater mix of short lived assets. Due to the timing of delivery of additional capacity in H1 including large finance lease sites, we expect growth rates in H1 will be higher than in H2. We remain focused on delivering revenue growth and increasing our operational agility. And as a result, we expect operating margins to be relatively unchanged year over year.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

And finally, we expect our FY 2026 effective tax rate to be between 1920%. Now to our outlook for the first quarter. Based on current rates, we expect FX to increase total revenue growth by two points. Within the segments, we expect FX to increase revenue growth by roughly three points in Productivity and Business Processes and roughly one point in Intelligent Cloud and More Personal Computing. We expect FX to increase COGS and operating expense growth by roughly one point.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

In commercial bookings, we expect healthy growth on a growing expiry base. Bookings growth will again be driven by strong execution across our core annuity sales motions and long term commitments to our platform. As a reminder, larger long term Azure contracts which are more unpredictable in their timing drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should be roughly 67% down year over year driven by the impact of continuing to scale our AI infrastructure. We expect Q1 capital expenditures to be over $30,000,000,000 driven by the continued strong demand signals we see.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

As a reminder, there can be quarterly spend variability from cloud infrastructure build outs and the timing of delivery of finance leases. Next to segment guidance. In Productivity and Business Processes, we expect revenue of 32,200,000,000.0 to $32,500,000,000 or growth of 14% to 15% with roughly three points of benefit from FX as noted earlier. In M365 Commercial Cloud, we expect revenue growth to be between 1314% in constant currency with business trends that remain relatively stable compared to the prior quarter. ARPU growth will again be driven by E5 and M365 Copilot.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

M365 Commercial Products revenue growth should be in the mid to high single digits. As a reminder, M365 commercial products includes both the Windows commercial on premises components of M365 suites and office transactional purchasing both of which can be variable due to end period revenue recognition dynamics. M365 consumer cloud revenue growth should be in the low 20s driven by the January price increase. For LinkedIn, we expect revenue growth in the high single digits. And in Dynamics three sixty five, we expect revenue growth to be in the high teens with continued growth across all workloads.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

For Intelligent Cloud, we expect revenue of $30,100,000,000 to $30,400,000,000 or growth of 25% to 26% with roughly one point of benefit from FX as noted earlier. Revenue will continue to be driven by Azure, which can have quarterly variability in year on year growth rates depending on the timing of capacity delivery and when it comes online as well as from in period revenue recognition depending on the mix of contracts. In Azure, we expect Q1 revenue growth of approximately 37% in constant currency driven by strong demand for our portfolio of services on a significant base. Even as we continue bringing more data center capacity online, we currently expect to remain capacity constrained through the first half of our fiscal year. In our on premises server business, we expect revenue to decline in the low to mid single digits with the ongoing customer shift to cloud offerings.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

In More Personal Computing, we expect revenue to be 12,400,000,000.0 to $12,900,000,000 Windows OEM and devices revenue should decline in the mid to high single digits. We expect the elevated inventory levels at the end of Q4 to come down through the quarter in Windows OEM, although the range of potential outcomes remains wider than normal. Devices revenue should decline. Search and news advertising ex TAC revenue growth should be in the low to mid teens, down sequentially as growth rates normalize following the benefit from third party partnerships noted earlier. Growth will continue to be driven by volume and revenue per search across Edge and Bing.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Overall Search and News advertising revenue growth should be in the low double digits. And in gaming, we expect revenue to decline in the mid to high single digits against a strong prior year comparable. We expect Xbox content and services revenue to decline in the mid single digits. Now back to company guidance. We expect COGS of 24,300,000,000.0 to $24,500,000,000 or growth of 21% to 22% and operating expense of 15,700,000,000.0 to $15,800,000,000 or growth of 5% to 6%.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Other income and expense is estimated to be negative $1,300,000,000 primarily due to investments accounted for under the equity method. As a reminder, we do not recognize mark to market gains or losses on equity method investments. And lastly, we expect our Q1 effective tax rate to be between 1920%. In closing, we finished the year with double digit revenue and operating income growth and exceeded the FY 2025 operating margin commitment we shared a year ago. Our focus remains on investing in security, quality and AI platform and product innovation that delivers value and opportunity to our customers.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

We are excited for FY 2026. With that, let's go to Q and A, Jonathan.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Amy. We'll now move over to Q and A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?

Operator

Thank And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Thank you guys for taking the question and congratulations on a fantastic end to FY 2025. I've been covering like this off for a while. I don't think I've ever seen a quarter where like everything came together this well. So congratulations on that.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Thank you for calling InCom Conferencing. The next available operator will be with you momentarily.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So these are workload results that are invaluable for us to learn to build both the products as well as the platform. And then broadly they or rather over time, there will be broad diffusion. In fact, one of the things that Amy and I track is not just the head app usage, but also what's the sort of all the Tier two applications that are being built. So that sort of that speaks a little bit, Keith, to I think your question is as long as we have head apps shaping the platform and then after that we have the broad diffusion happen, which in some sense we're both of those is what we're seeing. So I feel very good about being in standing going forward.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Keith. Operator, next question please.

Operator

The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed.

Mark Moerdler
MD, SVP & Senior Research Analyst at AB Bernstein

Thank you. I'd also give you my congratulations. Amazing. I didn't know how you were going to beat last quarter and you did it. So congratulations.

Mark Moerdler
MD, SVP & Senior Research Analyst at AB Bernstein

And thank you for taking my question. Satya and Amy, we're now two plus years since the Gen AI revolution and adoption is still early in ramping. What do you think is the best way that software companies are going to be able to monetize AI for SaaS? Do you believe there are differences in monetization for horizontal more general apps like M365 Copilot or Dynamics CRM Copilot versus very targeted capacities on the AgenTex side? And also how should you think about the trajectory of SaaS AI margins over the long term? Thank you.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. I'll start and Amy, you should feel free to add. I mean, if I just broaden out beyond just SaaS as a category, I think just like the server to cloud transition, was an expansion of essentially usage of servers. That is essentially what happened with the cloud, right, which is we did a bunch of servers except that the expertise required, the capital required, the time required to bring up servers, build it out, scale it was just all hard. And so therefore, the market was a certain size, whereas with the cloud, you could sort of buy it with flexibility, you could burst and you could spin up and spin down, expertise required came down.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So it was just orders of magnitude. That's what's happening.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So if you sort of even subscribe to this point of view that intelligence is basically log of compute, That means compute is going to grow and you've got to use it as efficiently as possible to just keep creating intelligence. Now, how does it manifest beyond just the infrastructure? I kind of to Keith's earlier question, I talked a little bit about how infrastructure is getting shaped, data layer is getting shaped, the app server is getting built. These are all classic categories of infrastructure that will continue, but they will be an order or two of magnitude more. So literally like in fact, of the other things we track is every GPU requires storage and compute.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

That ratio is another thing that is really exponential for infrastructure growth. So when you go to the app layer, the SaaS apps themselves are now building in effectively agentic and chat interfaces with intelligence and they're also building autonomous agents. Agents are kind of like applications like a database application perhaps, but they are being used increasingly inside of a user interaction. I think a good example is GitHub Copilot. It got started as an ex you know, code completions on an IDE.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Then we added the chat interface to it. Then we added the agent mode to it. And now we have an autonomous agent, which in fact works completely asynchronously. Right? So all those four things, are now part of essentially GitHub.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And by the way, it also turns out that every other tool that is also doing any form of coding is adding more and more GitHub repos. So if I had to think about GitHub monetization, we have an opportunity around just monetizing GitHub Enterprise and then we have the ability to think about GitHub Copilot and GitHub Copilot as with all these form factors. And so that's exactly the same thing that's happening with Microsoft three sixty five. That's the same thing that's happening with Dynamics three sixty five. So you have to be very open to taking your data tier, your business logic tier and your UI tier and sort of being more expansive in it.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

As long as you do that, it's just that usage goes up, and that's what I think shows up in the results.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

And I think, Mark, if you wanted to think about all the things and the layers Hathi talked about is really we're seeing very similar monetization tools exist in this transition, right? There's a per user logic, there's tiers of per user, sometimes those tiers relate to consumption, sometimes there's pure consumption models. I think you'll continue to see a blending of these, especially as the AI model capability grows, you'll end up with ways that teams are going to want to throttle that usage, use the best models for the best job. And I think the blending of these models will continue to be something we see on a go forward basis.

Mark Moerdler
MD, SVP & Senior Research Analyst at AB Bernstein

Thank you. I appreciate it.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Mark. Operator, next question please.

Operator

The next question comes from the line of Karl Keirstead with UBS. Please proceed.

Karl Keirstead
Karl Keirstead
Managing Director - Software Equity Research at UBS Group

Okay. Thanks. Sachin and Amy, this is the second quarter in a row of pretty material Azure upside from what sounds like an acceleration in on prem to Azure migration activity. I'm just wondering if you can comment on the plethora of customer conversations you've had whether there are a couple of two or three specific catalysts that are driving that migration and how durable a trend do you think that is? Thank you.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. I mean just there are three things that are really happening. One is the migrations. A good example would be what I referenced in my remarks with Nestle with the SAP instances. They moved along with a lot of the data that's associated with it in a bunch of servers.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So that's kind of a classic example. I think whether it's VMware migrations or migrations of SAP or even just our own server migrations, they're pretty healthy. And as it turns out that we're still not anywhere close to the finish line, if at best maybe in the middle innings of that. The second thing that's also happening is cloud native applications that are scaling. This is even excluding all of the AI stuff, just the classic cloud native e commerce company, let's say.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

These are scaling in a big way. And some of those customers were not on Azure previously, but now they're increasingly there because they have come for AI perhaps, but they now stay for more than AI. And so to me, that's another thing you see in overall, what's happening across the Azure number. And then of course there are the new AI workload. So those are three things that are all in some sense building on each other, but that's kind of what's driving our growth.

Karl Keirstead
Karl Keirstead
Managing Director - Software Equity Research at UBS Group

Got it. Thank you.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Karl. Operator, next question please.

Operator

The next question comes from the line of Brent Thill with Jefferies. Please proceed.

Brent Thill
Brent Thill
MD & Tech Sector Leader - Software & Internet Research at Jefferies

Satya, back to the strength across the board in the quarter. Was there anything that jumped out you or surprised you that you didn't think you were going to see, but you did see in the quarter? Just the magnitude of upside, I think, had shocked many here.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. I don't know, Brett, if anything really surprised us. But I think what, we are noticing in our own build out of these AI applications and in general is the platform is becoming more than here is a model and here is an API, make some calls, right? I mean that in some sense, was a bit of the state of the art maybe even a year ago. Whereas now you have essentially these very stateful app patterns that are emerging that require quite a bit of rethinking of even the app stack.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

I mean, take even the storage tier stuff, The degree of sophistication you have and hey, how much of an index do you really want to build by pre processing so that your prompt engineering or context engineering as I called can be better and higher quality. So I think all of that is emerging. So when I look at a product like Azure Search, Fabric and Cosmos DB, all of the things, the frameworks around it are just becoming robust to build serious applications. And so that's what I feel great about is the learning curve inside the company, outside the company, the diffusion of this tech, the speed with which that's emerging, that you can build applications is much faster, right? I always go back and say, hey, when a relational database came out, it took a while for people to build an ERP system, let's say.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And this thing, we're kind of building pretty sophisticated applications at a very, very fast clip based on I think the degree of maturity that's emerging.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Brent. Operator, next question please.

Operator

The next question comes from the line of Raimo Lenschow with Barclays. Please proceed.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Perfect. Thank you. Congrats from me as well. I had one question around Copilot, and I'm obviously a happy user here at Barclays. If you think about it, the one thing that we're all realizing is that Copilot is the AI part, but data is becoming more and more important.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

And then from there on, we can start thinking about agents. Where is the what are you seeing in your customer conversations, Satya, about like that understanding that Copilot is actually just the starting point and then from there on it's becoming like much, much broader? Thank you.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. I think that that's right. Even inside of Copilot, I'm sure you're seeing it, right? You now have analyst and researcher to just talk about two examples and of course, people, all the third party agents. So yes, there is a lot more of this is not request response.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

It's about spawning essentially applications, that then go to work and come back. But the UI still remains very important, right? Even for asynchronous work to instruct the asynchronous work, you need UI. And to monitor asynchronous work, you need UI. It may be different.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

It may not be a chat interface. And of course, you need a way to then inspect what the asynchronous work is, right? So even take the example I was giving on GitHub. Even if you're not using GitHub Copilot to create the code check-in or the pull request, interestingly enough, we're seeing massive increase to GitHub Copilot code review agent, even if you used maybe Code or whatever else to write the code. So that's I think what's happening across all of these systems.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So you're absolutely right that you need it starts with some kind of a UI that's more chat focused, but it quickly goes beyond it. And you see it in M365, you see it in Dynamics three sixty five and you see it in GitHub.

Raimo Lenschow
Raimo Lenschow
Managing Director at Barclays

Thank you.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Raimo. Operator, next question please.

Operator

The next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Hi, thank you very much. Amy, I want to acknowledge that, I think a few quarters ago, you said that you reach a point in time where you can accelerate Azure while slowing down CapEx. So you did it. But what is the outlook? When I look at the CapEx guidance for the upcoming quarter, certainly, I would view that as a positive indicator of the book of business you have for your cloud services.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

But how should we think about the shape of the curve of CapEx vis a vis Azure growth rate in the years ahead, particularly as I listened to Satya's comments on the AI stack consuming more and more infrastructure? Are we at a point where we're going to have to continue to do this and we magically wait for inference and applications to kick in and therefore create a richer gross margin mix? Thank you so much for your comments and congrats on the quarter.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Thanks, Kash. Let me back up and first say, when you think about the full year comments I've made on CapEx as well as the Q1 guidance of over 30,000,000,000 you first have to ground yourself in the fact that we have $368,000,000,000 of contracted backlog we need to deliver not just across Azure, but across the breadth of the Microsoft cloud. So in terms of feeling good about the ROI and the growth rates and the correlation, I feel very good that the spend that we're making is correlated to basically contracted on the books business that we need to deliver and we need the teams to execute at their very best to get the capacity in place as quickly and effectively as they can. And so when you look, we've talked about the growth rate will decline year over year, but at its core, our investments, particularly in short lived assets like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And I talked about, my gosh, in January and said, I thought we'd be in better supplydemand shape by June.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

And now I'm saying, I hope I'm in better shape by December. And that's not because we slowed CapEx even with accelerating the spend and trying to pull leases in and get CPUs and GPUs in the system as quickly as we can. We are still seeing demand improve. And so I am not as focused, Kash, on trying to pick a date at which revenue growth and CapEx growth will meet and cross. I'm focused on building backlog, building business and delivering capacity, which we are seeing has a good ROI today in terms of our ability to get that done.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

So I don't want people to get overly focused on a pivot point because when you're in sort of these expansive moments, picking a data point usually means you're going to pick to be too conservative in terms of market share gain and in terms of winning. And so I tend to put my energy more there. Yes.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

I think one of the other things, Kash, is that I think I said this in a previous earnings as well, which is the difference between a holster and a hyperscaler is software, and the same is going to be true here. That GPD four point example I gave is all software, The optimization even in the last year. So we know how to use the software skills to take any piece of hardware and make it multiple X better. And so that's kind of where the yield will come. But as Amy said, while you're really going and building out the plant, you don't want to sort of

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

You just want to go in parallel on all of these fronts, and that's sort of what will compound over time.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

And I do think it's important when Plata talks about the software layer, he's talking about in his comments to connect this back to the compounding S curves. And so I would remind people that is something that we saw through the prior cloud transition. It's how we operated through that one. And the same sort of skills and logic done at an even faster pace is what will apply the same transition.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Sounds very encouraging. Thank you so much.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Kash. Operator, next question please.

Operator

The next question comes from the line of Michael Turrin with Wells Fargo. Please proceed.

Michael Turrin
Michael Turrin
MD & Equity Research Analyst at Wells Fargo

Hey, great. Thanks very much for taking the questions and congrats from me as well on the metrics working in concert here. Amy, maybe on margin impressive to hear expectations for flat operating margin in the upcoming year as you absorb some of the mix shift towards Azure and some of the more AI focused offerings. Can you speak in more detail just around your ability to manage those trade offs and offset some of the mix shift? And I'm wondering specifically just on any productivity gains you're seeing from leveraging AI internally that you'd highlight or anything else you just mentioned in underpinning the full year expectation there? Thanks,

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Michael. I think really, the area to focus on is when you think about margin. I think sometimes people get a lot of energy around cost control as a driver of margin. The other driver is to focus on making sure you deliver great product that's competitive and innovative and can take share because that drives revenue. And revenue itself and revenue growth, as you all know better, even perhaps than I do, is a durable way to see margin improvement.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

It builds on itself. That being said, the second thing I would point to is really what I talked to Cash a little bit about before, Tati and I both mentioned it, is applying all of our skill set here to deliver efficiencies, whether that's at whatever layer of the stack that exists. The S curve is compound, and we are doing that work, and we're focused on it. At the same time, we're doing the build out. So you'll see improvements there even as we continue to invest.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

And then, of course, it's about continuing to have great talent here, focus on products and opportunities where we have the biggest markets and the most likelihood of success. And so when we have those three things happen and the energy is right and the focus is there, it gives me confidence in terms of margin delivery. But make no mistake, it starts and ends really with product, which is what we're really focused on here and delivering that to customers.

Michael Turrin
Michael Turrin
MD & Equity Research Analyst at Wells Fargo

That all sounds pretty good. Thanks very much.

Jonathan Neilson
Jonathan Neilson
VP - IR at Microsoft

Thanks, Michael. That wraps up the Q and A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Thank you.

Amy Hood
Amy Hood
EVP & CFO at Microsoft

Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Executives
Analysts
    • Keith Weiss
      Equity Analyst at Morgan Stanley
    • Mark Moerdler
      MD, SVP & Senior Research Analyst at AB Bernstein
    • Karl Keirstead
      Managing Director - Software Equity Research at UBS Group
    • Brent Thill
      MD & Tech Sector Leader - Software & Internet Research at Jefferies
    • Raimo Lenschow
      Managing Director at Barclays
    • Kash Rangan
      Managing Director at Goldman Sachs
    • Michael Turrin
      MD & Equity Research Analyst at Wells Fargo
Powered by Quartr