After the bell today, Microsoft will announce its first-quarter fiscal year 2026 earnings. Last quarter was a banger by all measures, with revenue from its Azure cloud business growing at a brisk 39% year on year, making it the envy of the industry. Things were so good, it even reported a $368 billion backlog of business.
FactSet’s analyst consensus estimates are for earnings per share of $3.67 and $75.4 billion of revenue for the quarter ended September 30, 2025. Analysts are expecting Microsoft’s Intelligent Cloud unit, which includes Azure and other cloud services, to pull in $30.2 billion for the quarter. The FactSet estimate for Azure’s year-on-year revenue growth is 38%.
Fresh off an announcement that it has updated its partnership with OpenAI, after the $500 billion startup completed its restructuring into a for-profit public benefit corporation (controlled by a non-profit), Microsoft occupies a strong position in the AI industry, even if talk of an AI bubble turns out to be true.
New terms in OpenAI deal = new opportunities
After a period of tumultuous negotiation, Microsoft updated its $13 billion partnership with OpenAI. Having the uncertainty of such an important deal resolved brings some clarity to the larger AI landscape and creates some new opportunities for Microsoft. The new deal leaves Microsoft with a stake in OpenAI worth about $135 billion, or roughly 27% of the company.
Microsoft is now free to pursue AGI on its own, or with partners. Up until now, Microsoft has mostly embraced OpenAI’s technology for use in its products (like Copilot), and doesn’t really have a large flagship AI model of its own yet (though it has built smaller, specialized models like Phi and MAI-1).
OpenAI is also agreeing to purchase $250 billion worth of Azure computing as part of the reworked deal. But one thing could hurt Microsoft: it has given up its right of first refusal to be OpenAI’s main computing partner. That could mean losing a lot of business from the industry leader if OpenAI takes its compute to a competitor or uses its own Stargate data centers.
Microsoft still retains its slice of OpenAI’s revenue in the agreement, which Bloomberg has reported to be 20%, but that would end if OpenAI achieves AGI (which an independent expert would confirm).
Microsoft still has IP rights for OpenAI’s models and products that will now extend to 2032, and access to research IP rights (how they build their models) until 2030, unless AGI is achieved. That allows it to continue to use the state-of-the-art AI in all of its existing products for the foreseeable future.
Pulling production from China, Xbox price hikes
Elsewhere in Microsoft’s sprawling business, the company has pledged to shift the bulk of its hardware production outside of China, a move sure to please the Trump administration.
But President Trump’s chaotic tariff policies may be starting to affect Microsoft’s hardware business. Prices on the Xbox were hiked twice this year already, and Microsoft also raised the prices on its monthly Game Pass subscription by 50%.
Capex slowdown?
On last quarter’s earnings call, Microsoft CFO Amy Hood noted that Q1 would continue to see capital expenditure outlays over $30 billion, but investors might be happy to hear that the huge spending could slow in the second half of the fiscal year:
“Capital expenditure growth, as we shared last quarter, will moderate compared to FY25 with a greater mix of short-lived assets. Due to the timing of delivery of additional capacity in H1, including large finance lease sites, we expect growth rates in H1 will be higher than in H2.”
Microsoft releases its earnings after the closing bell today at 4 p.m. ET.
Editor’s note, 1:16 p.m. ET October 29, 2025: An earlier version of this article misstated analysts’ estimates for intelligent cloud revenue.
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