Microsoft: Cloud and AI revenue accelerating, Capex will increase in FY27

Azure +43% YoY, Remaining Performance Obligation +84%

Nicolas Baratte - TechStock01

Jul 30, 2026

4Q26 (Jun-26): small beat but the news is Azure: revenue up 43% YoY, from previous quarters 40%, next quarter guided at 45% growth YoY. Azure passed $100bn annual revenue in FY26, up 41%.
Commercial RPO (Remaining Performance Obligation) is $678bn, +84% YoY. The sequential increase came entirely from customers outside frontier model labs. Microsoft is trying to explain that its Cloud / AI growth does not (mostly) depend on OpenAI or Anthropic.
Capacity demand still exceeds supply, despite increase in efficiency and faster capacity delivery. Calendar 2026 Capex plan unchanged, but an accounting trick lowers financial leases and “stated capex” declines from $190bn to $175bn.
Microsoft was Free Cash Flow positive every quarter of FY26, expects to be positive in FY27.
The stock is trading at 20x FY27 EPS, 16.8x FY28.

1. Strong and accelerating Cloud growth

Numbers are impressive.

Microsoft closed its FY26 in June. For FY26,

Total revenue $332 bn, up 18% YoY (FY25 15%)
Microsoft Cloud revenue $214 billion, up 27% (FY25 23%). Nearly 90% of revenues from customers outside of frontier model companies.
Intelligent Cloud revenue $138bn, up 30% (FY25 21%)
Azure surpassed $100 billion, up 41%

June-26 (4Q26): Cloud growth accelerating

Microsoft Cloud growth stable (27% YoY)
Intelligent Cloud growth accelerating (32% YoY)
Azure growth accelerating (43% YoY)

2. Backlog is enormous, and the growth is broad beyond OpenAI

Commercial RPO (Remaining Performance Obligation) $678bn, +84% YoY, up from $627bn in 3Q26.
All sequential RPO growth came from customers outside the frontier model companies. RPO +25% excluding OpenAI.
Weighted average duration 2.3 years. Roughly 30% converts to revenue in the next 12 months, that near-term portion increased +37% YoY. The portion beyond 12 months increased +112% YoY.
Related party disclosure: FY26 revenue from commercial arrangements with OpenAI, including revenue-sharing payments, was $24.1bn. Accounts receivable from OpenAI $6.0bn. Microsoft holds an approximate 25% as-converted equity method interest, with $13.0bn of funding commitments of which $11.9bn funded.
Microsoft tries to explain that Cloud growth is not driven by OpenAI or Anthropic.
“All sequential commercial RPO growth was driven by commitments from customers outside of frontier model companies“

3. No more open buffet, “we are moving from seats to a seats plus consumption model”

CEO Nadella repeated 2 times: no more open buffet pricing.

“we are also evolving our business model beyond per-seat to per-seat-plus-consumption”
“we are also moving from seats to a seats plus consumption model”
“stronger-than-expected GitHub Copilot consumption following the June business model change to align pricing with usage and value”
Model shift from per-seat to per-seat plus consumption across M365, Dynamics 365 and GitHub. Usage-based billing added to Cowork earlier in July.
Copilot revenue accelerated over 60% quarter-over-quarter.
Copilot over 30 million paid seats, up from over 20 million in 3Q26.
GitHub Copilot 50 million users. Usage-based billing introduced in June. GitHub Copilot revenue accelerated over 60% QoQ.

4. Capex is unchanged but lower… Accounting trick to lower reported capex

Useful life of datacenters and office buildings extended from 15 to 25 years, effective start of FY27. Minimal benefit to FY27 operating income.
The real effect is on capex classification. More future datacenter leases become operating leases rather than finance leases. Finance leases are included in capex, operating leases are not.
Calendar 2026 capex expectation therefore moves from approximately $190bn (April guide) to approximately $175bn, with no change to underlying investment plans.
1FY27 capex expected to grow YoY.
Off balance sheet scale to watch: leases not yet commenced, primarily datacenters, total $329.1bn as of 30 June 2026, commencing between FY27 and FY33 (10-K).

“we are extending the estimated useful lives of our datacenters and office buildings, from 15 to 25 years, reflecting our operating history and expected use of these assets.

“This change affects only the timing of future depreciation and is expected to have a minimal benefit to FY27 operating income.

“The greater impact is on capital expenditures as more of our future datacenter leases will shift from finance leases to operating leases. Finance leases are included in capital expenditures while operating leases are not.

Outside of this useful life impact, our calendar year 2026 CapEx investment expectations remain unchanged. However, the shift from finance to operating leases adjusts our expectation to approximately $175 billion”

5. FY27: Cloud revenue up, Traditional revenues down

First management gave a warning on Traditional revenues that will decline:

M365 Commercial products (that’s Office 365 online) and Server products (old style Enterprise IT, SQL): we expect revenue to decline in the mid-single digits for the full fiscal year.
Windows OEM and Devices (that’s Windows in PC) will be impacted by lower PC market: we expect revenue to decline in the high-teens for the fiscal year.

But Commercial & Cloud will remain “strong”:

At the company level, with strong commercial momentum, we continue to expect another fiscal year of double-digit revenue and operating income growth.

FY27 capital expenditures will grow year-over-year given demand signals across our portfolio.

Even as we invest to meet growing demand, full fiscal year operating margins should be down less than a point. In addition, we expect to remain free cash flow positive in FY27.

4Q26 results (June 2026 quarter)

Small beat

Next quarter guidance (1Q27, September 2026 quarter)

Revenue $89,850m to $90,950m, growth of 16% to 17%. Consensus into the print was about $89.66bn. Guidance is inline.
Cost of revenue $29,600m to $29,800m, growth of 23% to 24%.
Operating expenses $16,800m to $16,900m, growth of 7% to 8%.
Operating margins relatively flat YoY.