October 31, 2025
BlogMicrosoft Q1 FY’26 earnings: Cloud supply constraints to last through at least June 2026
Microsoft’s continued huge and growing capital expenditure spending was the big story this week. For customers, the key take-away from Microsoft’s Q1 FY’26 earnings is Microsoft is still supply-constrained state for cloud compute, with its executives saying they don’t see the situation changing until sometime after June 2026. The extent to which this will affect current and future Azure customers isn’t clear.
Microsoft’s Q1 revenue was $77.7 billion, up 18 percent, and net income at $27.7 billion. The Intelligent Cloud business, which includes Azure, brought in $30.9 billion, up 28 percent. Microsoft rarely discusses Azure revenue figures, though last quarter execs did say Azure and related cloud services surpassed $75 billion in fiscal 2025. Microsoft also no longer publicly discloses the point contribution of AI to its Azure numbers.
Last quarter, Chief Financial Officer Amy Hood said Microsoft expected supply constraints to ease in fiscal 2026. But that’s no longer the case.
“We know we’re behind. We do need to spend,” said Hood.
In fiscal 2026, which began July 1, Microsoft plans to increase AI capacity by 80 percent and nearly double its datacenter footprint over the next two years, CEO Satya Nadella said. Microsoft currently has more than 400 datacenters; its newest ones tend to be larger, square-footage-wise.
Hood said Microsoft will increase its spending on GPUs, CPUs, and datacenter leases in fiscal 2026. In Q1, Microsoft’s capital expenditures were $34.9 billion, higher than the $30 billion officials were predicting last quarter.
Hood said roughly half of Q1 capex spending went toward CPUs and GPUs that support increasing Azure platform demand, first-party apps and AI solutions and R&D by its product teams, plus replacement for end-of-life server and networking equipment. The other half was for “long-lived” assets that will support the platform for the next 15 years and beyond, including finance leases for large datacenter sites.
Still No M365 Copilot Sales Disclosures
Commercial bookings were up a whopping 112 percent this quarter — “significantly ahead of expectations,” Hood said. A substantial part of this is from Azure commitments from OpenAI, she said, as well as continued growth in the number of 100-million-dollar-plus contracts for both Azure and Microsoft 365. (It’s worth noting these numbers do not include the $250 billion Azure commitments from OpenAI that the two companies announced earlier this week, as part of the details of their new partnership agreement.)
Unsurprisingly, Microsoft still did not disclose sales numbers for Microsoft 365 Copilot during its Oct. 29 earnings call. Officials said the company’s “family of Copilots and agents” surpassed 150 million monthly active users across Microsoft 365 Copilot, GitHub Copilot, Security Copilot and other “high-value domains.” Last quarter, officials said that number was 100 million.
For what it’s worth, officials also claim that Microsoft now has 900 million monthly active users of our AI features across its products.
Microsoft-OpenAI: A Bit More Peace of Mind
Speaking of the updated Microsoft-OpenAI partnership deal, there seems to be little new that will affect Microsoft customers directly, beyond some possible peace of mind that Microsoft will continue to have access to OpenAI IP for several more years.
Microsoft is getting a 27 percent equity stake in OpenAI’s new for-profit entity. Microsoft no longer has a “right of first refusal” on new OpenAI cloud workloads, but it will retain IP rights to OpenAI models and products through 2032. OpenAI can jointly develop some products with other companies, but API products are exclusive to Azure. And once OpenAI declares it has achieved the elusive Artificial General Intelligence (AGI) mark, which affects Microsoft’s access to its technology, a panel of unnamed experts will have to verify that claim.
“This punts into the long grass the idea that Microsoft might lose its exclusive access to OpenAI’s fundamental models. Specifically, OpenAI can no longer just declare it has reached AGI and use that to bring on other API providers,” said Directions on Microsoft analyst Greg DeMichillie.
“If you are using Azure OpenAI but were afraid that somehow OpenAI would pull the rug out from under you and you’d be left stranded, that doesn’t seem like a concern anymore,” DeMichillie added.
Microsoft disclosed that its investment in OpenAI resulted in a $3.1 billion ding to net income in the quarter. By The Register’s calculations, that could mean that OpenAI itself lost $11.5 billion for the quarter.
