Episode
Microsoft (MSFT): Its Best Quarter Ever — But $140B of AI Capex Is Eating the Cash Flow
- Published
- Jul 30, 2026
- Duration seconds
- 966
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Summary
Microsoft Corporation (MSFT) Q4 FY2026 — Microsoft (MSFT) reported fiscal Q4 2026 (quarter ended June 30, 2026) after the close on July 29, 2026, alongside its FY26 10-K. Revenue was $90.007B, +18% YoY (+17% constant currency) versus roughly $87.6B expected; GAAP diluted EPS $4.81 (+32%) and adjusted EPS $4.74 versus about $4.24 expected; operating income $40.6B (+18%) at a 45.1% margin. Azure and other cloud services grew 43% (43% cc), accelerating from 39/40/39/40 in the four prior quarters, and Azure crossed $100B of annual revenue for the first time. Microsoft Cloud revenue was $59.3B (+27%) but its gross margin fell to 65% — a fourth consecutive quarterly decline from 68%, which management attributes to sales mix shift to Azure and continued AI infrastructure investment. Commercial remaining performance obligation reached $678B (+84%; +25% excluding OpenAI) with a 2.3-year weighted-average duration. Microsoft 365 Copilot passed 30 million paid seats (from 15M two quarters ago) while M365 commercial seat growth stayed at +6% for a sixth straight quarter — so Copilot is ARPU, not seats. For the full fiscal year: revenue $331.8B (+18%), operating income $155.2B (+21%) at a 46.8% margin (+120bps), GAAP EPS $17.95 (+32%). The problem is cash: FY26 cash additions to property and equipment were $115.9B plus $24.6B of finance-lease additions (~$140.6B, 42.4% of revenue versus 22.9% in FY24), so free cash flow fell for a third straight year to about $67.0B (from $71.6B and $74.1B) and Q4 free cash flow dropped 23% to $19.6B. Leases signed but not yet commenced jumped from $92.7B to $329.1B. Depreciation is up 126% in two years to $34.3B. Microsoft funded all of it with zero new debt, drawing cash down 18.7% to $76.8B, lifting finance-lease liabilities 44% to $66.6B and str…