Cloud gross margin compression has been noted by Amy E. Hood, with Microsoft’s cloud gross margin percentage expected to be around 66%, down year over year due to continued investments in AI and a shift to Azure. Volatility in other income is expected due to OpenAI’s conversion to a public benefit corp. Gaming revenue declined by 3% in constant currency, with further declines anticipated next quarter.
Commercial bookings increased by 112% in constant currency, driven by Azure commitments from OpenAI and large contracts. Commercial remaining performance obligation (RPO) reached $392 billion, up 51% year over year. Operating income increased by 22% in constant currency, with company-level operating margins at 49%.
Total revenue reached $77.7 billion, up 17% in constant currency, with cloud revenue at $49.1 billion, up 25% in constant currency. Productivity and business processes segment revenue grew to $33 billion, up 14% in constant currency. Intelligent cloud segment revenue increased to $30.9 billion, up 27% in constant currency.
Free cash flow rose to $25.7 billion, up 33%, driven by strong cloud billings and collections. LinkedIn revenue increased by 9% in constant currency. Gaming revenue declined by 3% in constant currency. The Q2 outlook includes revenue guidance of $79.5 billion to $80.6 billion for fiscal Q2 2026.
Microsoft reported accelerating demand for cloud and AI services, with triple-digit commercial bookings growth and a record RPO balance concentrated in short-duration contracts. The company finalized a new, long-term agreement with OpenAI for Azure exclusivity and expanded IP rights. Microsoft Cloud revenue surpassed $49 billion, up 26% year over year.
Satya Nadella highlighted the progress in AI platforms and copilots, emphasizing the need for capacity expansion to meet growing demand. Microsoft’s investments in infrastructure and talent are crucial to scale AI capabilities, with Azure expected to remain capacity constrained through the fiscal year-end. The company is focused on building a fungible fleet to ensure efficient allocation of resources for AI services.
Read more at Nasdaq: Microsoft (MSFT) Q1 2026 Earnings Call Transcript