Microsoft: Fiscal 3Q26 Financial Results

Summary:

Revenue was $82.9 billion and increased 18% (up 15% in constant currency)
Operating income was $38.4 billion and increased 20% (up 16% in constant currency)
Net income was $31.8 billion and increased 23% on a GAAP basis, and increased 20% (up 18% in constant currency) on a non-GAAP basis
Diluted earnings per share was $4.27 and increased 23% on a GAAP basis, and increased 21% (up 18% in constant currency) on a non-GAAP basis
Non-GAAP results exclude the impact from investments in OpenAI, explained in the Non-GAAP Definition section below

Microsoft Corp. announced the following results for the quarter ended March 31, 2026, as compared to the corresponding period of last fiscal year.“We are focused on delivering cloud and AI infrastructure and solutions that empower every business to eval-max their outcomes in the agentic computing era,” said Satya Nadella, chairman and CEO, Microsoft. “Our AI business surpassed an annual revenue run rate of $37 billion, up 123% YoY.”

“We delivered results that exceeded expectations across revenue, operating income, and earnings per share, reflecting strong execution and growing demand for the Microsoft Cloud,” said Amy Hood, EVP and CFO, Microsoft.

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.

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Business Highlights
Microsoft Cloud revenue was $54.5 billion and increased 29% (up 25% in constant currency), and commercial remaining performance obligation increased 99% to $627 billion.

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Revenue in Productivity and Business Processes was $35.0 billion and increased 17% (up 13% in constant currency), with the following business highlights:

Microsoft 365 Commercial cloud revenue increased 19% (up 15% in constant currency)
Microsoft 365 Consumer cloud revenue increased 33% (up 29% in constant currency)
LinkedIn revenue increased 12% (up 9% in constant currency)
Dynamics 365 revenue increased 22% (up 17% in constant currency)

Revenue in Intelligent Cloud was $34.7 billion and increased 30% (up 28% in constant currency), with the following business highlights:

Azure and other cloud services revenue increased 40% (up 39% in constant currency)

Revenue in More Personal Computing was $13.2 billion and decreased 1% (down 3% in constant currency), with the following business highlights:

Windows OEM and Devices revenue decreased 2% (down 3% in constant currency)
Xbox content and services revenue decreased 5% (down 7% in constant currency)
Search advertising revenue excluding traffic acquisition costs increased 12% (up 9% in constant currency)

Microsoft returned $10.2 billion to shareholders in the form of dividends and share repurchases in the third quarter of fiscal year 2026.

Quarterly Highlights, Product Releases, and Customer Stories
Every quarter Microsoft delivers hundreds of products, services, and enhancements. These releases are driven by years of significant research and development investments, to empower customers with greater productivity, security, and differentiated value.

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Microsoft Cloud revenue reached $54.5B in Q3 FY2026, growing 29% YoY, an acceleration from $51.5B in Q2 FY2026 (26% growth) and $49.1B in Q1 FY2026 (also 26%). Over the trailing five quarters, Microsoft Cloud revenue climbed from $42.4B in Q3 FY2025, adding roughly $12B in quarterly revenue in just one year. Cloud gross margin percentage, however, continued its gradual decline to 66% from 69% a year earlier, as heavy investments in AI infrastructure and growing AI product usage outweighed efficiency gains in Azure and Microsoft 365 Commercial cloud.

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Azure and other cloud services revenue grew 40%, matching the strongest growth rate of the past five quarters and reversing a deceleration that had bottomed at 33% in Q3 FY2025, driven by strong demand across all workloads. The Intelligent Cloud segment overall posted $34.7B in revenue, up 30%, but cost of revenue surged 47% due to AI infrastructure buildout and increased GitHub Copilot usage, compressing segment gross margin percentage even as gross margin dollars grew 19%. Total AI revenue surpassed $37B in annual run rate, up 123%, encompassing customers building solutions on Azure, revenue from frontier model companies, and first-party AI applications, though Microsoft noted this figure excludes adjacent CPU, storage, and other services consumed alongside AI workloads.

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Commercial remaining performance obligation reached $627B, up 99% including OpenAI commitments, with a weighted average duration of about 2.5 years. Excluding OpenAI, RPO grew 26%, in line with historical seasonality, and roughly 25% will convert to revenue in the next 12 months, growing 39%. To support this demand, capital expenditures including finance leases totaled $31.9B, up 49%, with roughly two-thirds directed at short-lived assets, primarily GPUs and CPUs, powering Azure platform demand and AI solutions. Despite strong operating cash flow of $46.7B (up 26%), free cash flow fell 22% to $15.8B, reflecting the scale of investment Microsoft is directing at its cloud and AI opportunity.