Microsoft Q1 FY2027 earnings: Azure +48%, FCF $18.6B

Microsoft (MSFT) reported revenue of $92.3 billion for its fiscal first quarter of 2027 (July–September 2026), up 19% from $77.7 billion a year earlier, in a release filed with the SEC at 4:04 pm ET on Wednesday, Oct 28. Azure, its cloud computing platform, grew 48% to $33.2 billion, and operating income rose 21% to $45.9 billion.

The cash side moved the other way. Free cash flow, operating cash flow minus cash spent on property and equipment, fell to $18.6 billion from $25.7 billion, down 27.4% (MoverTape calculation from company figures), because cash spending on equipment roughly doubled. Microsoft still produced positive free cash flow in a week when Alphabet reported an outflow, and one day after the report it priced $25 billion of bonds.

Microsoft's fiscal year runs from July to June, so fiscal 2027 began on July 1, 2026, and its "first quarter" covers the same months as other companies' third quarter. This is also the first quarter reported under Microsoft's new structure of two segments, Agents and Infra and Devices and Consumer, which replaced its previous three.

Microsoft earnings vs a year ago

Sources: Microsoft's fiscal Q1 2027 release (8-K, Exhibit 99.1) and 10-Q for both columns, with the GAAP figures checked against StockFit. Microsoft's non-GAAP figures exclude net gains and losses from its investments in OpenAI. Growth rates are Microsoft's; both operating margins and the margin change are MoverTape calculations from company figures.

Why GAAP earnings grew 32% while the adjusted figure grew 18% comes down to one line: Microsoft's stake in OpenAI. Microsoft's non-GAAP (adjusted) measures leave out net gains and losses from its OpenAI investment. This quarter that investment produced a net gain of $272 million before tax, adding $207 million to net income and $0.03 to diluted EPS. A year ago it produced net losses of $4.1 billion before tax, which cut net income by $3.1 billion and EPS by $0.41. The year-ago losses lower the GAAP base; the adjusted comparison removes both years' effects (10-Q, non-GAAP reconciliation).

The 49.8% operating margin is the highest of the last five quarters, up from 45.1% in the April–June quarter (MoverTape calculation from StockFit quarterly figures; the April–June quarter is derived from the annual report as the full year minus the first nine months). Chief Financial Officer Amy Hood credited revenue growth and efficiency gains, partly offset by a shift in the sales mix toward Azure, which carries lower margins. Operating expenses rose 6%, and the 10-Q says total headcount fell 2%.

Microsoft earnings vs estimates

Microsoft headlines its adjusted EPS. That figure, $4.89, was above the StockFit consensus estimate of $4.71, from 14 analyst estimates, as of Oct 25. The OpenAI gain is already excluded from it; GAAP EPS, which includes the gain, was $4.92.

Revenue of $92.3 billion was above the LSEG consensus of $90.69 billion, as reported by CNBC.

Our guide to earnings reports explains why the GAAP and adjusted figures can tell different stories, and our preview of the week set out what was expected from all three cloud companies.

Agents and Infra and Devices and Consumer results

In September, Microsoft replaced its three reporting segments with two and restated the prior year on the new basis (8-K of Sep 2). Agents and Infra holds Azure, the Microsoft 365 cloud, productivity and server licensing, industry solutions, and frontier and support services. Devices and Consumer holds search and advertising, Xbox, and Windows OEM and devices. The year-ago figures below are the restated ones.

Source: Microsoft's 10-Q for the quarter ended Sep 30, 2026, segment results; growth rates are Microsoft's.

The 10-Q also breaks revenue down into eight product lines, each with a restated year-ago figure:

Source: Microsoft's 10-Q, revenue by product; Q1 FY2027 figures also in StockFit. Changes are MoverTape calculations from company figures.

How fast did Azure grow?

Azure revenue rose 48% to $33.2 billion. It is now 35.9% of Microsoft's revenue, and it supplied $10.8 billion of the $14.6 billion increase in total revenue, or 73.8% (MoverTape calculations from company figures). CNBC reported that this is the first time Microsoft has given Azure revenue in dollars.

Hood said on the call that Azure came in ahead of Microsoft's expectations even though some third-party capacity deliveries were delayed, and named two drivers: Foundry, its platform for building AI applications, whose revenue more than tripled, and better use of existing CPU capacity.

One caveat on comparisons. Before September, Microsoft reported growth for "Azure and other cloud services", a broader line. The 48% is for the redefined Azure line, so it is not comparable with growth rates or guidance Microsoft gave on the old basis. The like-for-like yardstick is the restated outlook Microsoft published on Sep 2: Azure growth of 44% to 45% in constant currency for the quarter. The comparison in the table, against $22.4 billion a year ago, uses the restated figure. Our guide explains why to compare with restated figures after a segment change.

The Microsoft Cloud, the company's broadest measure of its cloud revenue, brought in $63.9 billion, up 30% (31% in constant currency, which strips out exchange-rate moves). Commercial remaining performance obligation, the contracted revenue not yet recognized, rose 73% to $677 billion; Hood said about 30% of it will be recognized in the next 12 months. Commercial bookings fell 12%, which Hood attributed to large Azure commitments signed in the prior year.

How much revenue does Microsoft get from OpenAI?

The 10-Q answers it directly. Microsoft holds an equity-method investment representing about 24% of OpenAI on an as-converted basis, which makes OpenAI a related party. In the quarter, Microsoft recorded $10.0 billion of revenue from commercial arrangements with OpenAI, including revenue-sharing payments: about 10.8% of total revenue (MoverTape calculation).

The same note says OpenAI owed Microsoft $7.2 billion at Sep 30, up from $6.0 billion at Jun 30, and that Microsoft has funded $12.0 billion of its $13.0 billion in funding commitments.

Windows, Xbox and search

Devices and Consumer revenue fell 3% to $15.5 billion, while its operating income rose 2%. Windows OEM revenue, from licences sold with new PCs, fell 27%. Hood named three reasons: the prior year's demand ahead of the end of Windows 10 support, inventory drawdowns by PC makers and their channel partners, and weaker PC demand. Xbox revenue fell 2%. Search advertising revenue excluding traffic acquisition costs rose 12%.

How much did Microsoft spend on capex?

Capex, or capital expenditures, is spending on long-lived assets such as datacenters and servers. Microsoft's own capex figure includes finance leases, long-term datacenter leases counted at their full value when they start. It is a different measure from the cash paid for property and equipment on the cash-flow statement, and the two do not simply add up: Microsoft says the gap between them is mainly finance leases plus the timing of goods received but not yet paid for (fiscal Q1 2026 call).

On that definition, Hood put capex at $45.2 billion, including $7.4 billion of finance leases. Cash paid for property and equipment, a separate measure, was $39.4 billion. A year earlier, capex was $34.9 billion, including $11.1 billion of finance leases (fiscal Q1 2026 call), so it rose 29.5% (MoverTape calculation). About three quarters of this quarter's spending went to short-lived assets, mainly CPUs and GPUs, compared with roughly half a year ago.

Two notes on that figure:

• It came in below Microsoft's own outlook. In July, Hood expected capex of over $50 billion for the quarter (fiscal Q4 2026 call). She said the $45.2 billion reflected third-party capacity deliveries that slipped out of the quarter.
• The series is not fully like for like. In July, Microsoft changed the useful life it assigns to some assets, and as a result more of its future datacenter leases are operating leases, which are not counted in capex. Some spending that would once have appeared as finance leases now does not.

The cash measure has no lease component. Cash paid for property and equipment roughly doubled from $19.4 billion a year earlier, up 103% (MoverTape calculation), while operating cash flow rose 29% to $58.0 billion:

Source: StockFit quarterly cash-flow statements from Microsoft's SEC filings; Q4 FY2026 is the full year minus the first nine months. Free cash flow is operating cash flow minus additions to property and equipment, the definition behind the $18.6 billion Hood gave on the call. Over the last four quarters it adds up to $60.0 billion (MoverTape calculation).

Leases signed but not yet started

The capex figure leaves out leases Microsoft has signed whose terms have not begun. The 10-Q puts those at $364.6 billion at Sep 30, mainly for datacenters, starting between fiscal 2027 and fiscal 2034. A year earlier the figure was $106.2 billion:

Source: StockFit lease data from Microsoft's 10-Q and 10-K filings.

That is 3.4 times the level of a year earlier (MoverTape calculation). When these leases start, the ones classed as finance leases enter capex; the ones classed as operating leases do not. Finance lease liabilities already on the balance sheet were $71.0 billion at Sep 30.

Microsoft's $25 billion bond sale

Hood said on the call that Microsoft expects to stay cash-generating this fiscal year: "we expect to continue to remain free cash flow positive in FY27". She added that Microsoft will use additional sources of funding when it finds them attractive, and said in the Q&A that it had not yet tapped the debt markets.

The next day, Thursday, Oct 29, Microsoft priced $25.0 billion of notes in ten series, according to its pricing term sheet filed with the SEC: two floating-rate notes of $1.0 billion each, due 2028 and 2029, and eight fixed-rate notes due from 2028 to 2066 with coupons from 4.850% to 6.350%. The notes settle on Nov 4 and are rated Aaa by Moody's and AAA by S&P. Before this one, Microsoft's most recent free writing prospectus on SEC EDGAR, the filing type used for such term sheets, dates from Jan 31, 2017.

In the quarter itself, Microsoft repaid $4.9 billion of debt and raised none (StockFit cash-flow data). Cash and short-term investments were $64.5 billion at Sep 30, down from $76.8 billion at Jun 30 (10-Q).

Microsoft, Alphabet and Amazon: cash and capex

All three large cloud companies reported this week. Each line uses the company's own definitions and periods, so the figures are not a ranking:

• Microsoft, July–September: cash paid for property and equipment of $39.4 billion; free cash flow of $18.6 billion in the quarter and $60.0 billion over four quarters (MoverTape calculation).
• Alphabet, July–September: purchases of property and equipment of $51.4 billion; free cash flow of −$9.1 billion, operating cash flow minus those purchases (Alphabet's release).
• Amazon, July–September: gross purchases of property and equipment of $77.3 billion; free cash flow over the trailing twelve months of −$42.4 billion, on Amazon's definition, which subtracts purchases net of proceeds from sales and incentives (our Amazon recap).

Microsoft guidance for fiscal Q2 2027

Microsoft gives its outlook on the call, not in the release. First, the quarter just reported against the last outlook: in July, Hood guided to fiscal first-quarter revenue of $89.85–90.95 billion. The $92.3 billion came in $1.3 billion above the top of that range (MoverTape calculation).

For the October–December quarter, Hood's outlook, in US dollars unless noted:

• Revenue between $96 billion and $97.1 billion, growth of 18% to 19%. A year earlier, revenue was $81.3 billion (StockFit).
• Agents and Infra revenue of $80.1–80.7 billion, growth of 24% to 25%, and Devices and Consumer revenue of $15.9–16.4 billion.
• Azure growth of 49% to 50% in constant currency. Hood said customer demand still exceeds the capacity Microsoft has available, and that some third-party GPU capacity contracts have moved into the second half of the fiscal year.
• Operating margins down slightly from a year earlier. Cost guidance includes an estimate for the employee voluntary exit offer Microsoft recently announced. Tax rate about 20%.
• Capex of over $50 billion in the quarter, and about $170 billion for calendar 2026. In July, Hood had put calendar 2026 at about $175 billion; she attributed the lower figure to the third-party capacity delays. She expects capex to accelerate in the second half of the fiscal year.

How Microsoft stock moved

Microsoft closed at $531.01 on Wednesday, Oct 28, before the release. CNBC's report, last updated at 2:03 am ET on Thursday, said the shares rose 4% in extended trading on Wednesday evening.

That gain did not carry into the regular session. Microsoft closed at $530.14 on Thursday, Oct 29, down 0.2%. That left the stock 2.4% below its 52-week closing high of $543.45 on Oct 13 and up 9.6% for the year, from $483.62 at the end of 2025 (StockFit daily closes; MoverTape calculations).

The first session after a report has swung widely over the past year:

Source: StockFit daily closes; changes are MoverTape calculations.

We'll add Friday's official close from StockFit once the session ends. Microsoft's company page, linked from the ticker in the first paragraph, has the interactive price chart.

What to watch next

• Friday's close: the second full session after the report, added from StockFit after 4:00 pm ET on Oct 30.
• Nov 4: settlement of the $25.0 billion bond sale.
• Second-quarter capex: Microsoft expects over $50 billion for October–December, which would put calendar 2026 at about $170 billion, with spending accelerating from January as delayed third-party capacity arrives.
• Azure on the new basis: Microsoft guides to 49% to 50% growth in constant currency for October–December. For July–September, after restating its outlook on Sep 2, it had guided to 44% to 45% (8-K); Azure grew 48%, also 48% in constant currency.

For every new Microsoft story, follow the MSFT RSS feed.