After the close of U.S. markets on July 29, Microsoft reported its fourth fiscal quarter results for fiscal year 2026. Revenue reached $90 billion, up 18% year-over-year. Growth for Azure and other cloud services rose from 40% in the previous quarter to 43%. In the prepared remarks for the earnings call, CEO Satya Nadella added a statement he hadn’t been able to make before: Azure’s annual revenue “exceeded $100 billion,” growing 41%. This marks the first time the business has crossed the $100 billion threshold.
In the first十几 minutes after the earnings report was released, the stock rose less than 3% in after-hours trading. After the conference call concluded, the gain expanded to around 8%. The stock price climbed from its closing price of $390.54 to over $422. No new revenue figures were disclosed—instead, CFO Amy Hood provided guidance on capital expenditures. She stated that capital spending for the calendar year 2026 is expected to be approximately $175 billion. Three months ago, under the same metric, this figure was $190 billion.
Over the past three months, the market has treated the rule that “every additional dollar spent by cloud providers reduces valuation by a dollar” as the default. Before earnings season, Jason Lemire, Chief Investment Officer at Bold Wealth Partners, put it bluntly: “Previously, the more you spent, the better; now, the less you spend, the better.” So when Microsoft revised a $190 billion figure down to $175 billion, the market almost instinctively breathed a sigh of relief.
Is that $1.5 billion saved?
No.
Hood added another sentence in the same paragraph, stating that after this adjustment, “the investment outlook itself remains unchanged.” She also explained the source of the difference: starting in fiscal year 2027, Microsoft extended the depreciation life of its data centers and office buildings from 15 years to 25 years. This change pertains directly to depreciation, but it also inadvertently alters the classification of leases. With the extended life, more newly signed data center leases will shift from capital leases to operating leases, and only capital leases are included in capital expenditures.
The lighter section on the chart represents the portion removed from the reporting scope. The money still needs to be paid, and the data centers still need to be built; it will simply move from capital expenditures on the cash flow statement to rent expenses on the income statement. Microsoft provided a corresponding figure in its 2026 fiscal year 10-K lease footnote: as of June 30, the uncommenced lease commitments amount to $329.1 billion, which will be gradually recognized from fiscal years 2027 to 2033, primarily for data centers.
The change in depreciation period only appears in the prepared script for the earnings call. It is not mentioned in the press release, nor can the 25-year figure be found in the 10-K; the accounting policies section of that document still states that buildings have a depreciation period of 5 to 15 years.
Has capital expenditure really slowed down?
None at all.
According to Microsoft’s own verbal guidance during the earnings call, which includes lease financing, capital expenditures for this quarter amounted to $41 billion, a 70% year-over-year increase. Two years ago in the same quarter, it was $19 billion. For the entire fiscal year 2026, capital expenditures are projected at $145.3 billion, 2.6 times the amount in fiscal year 2024. The company’s guidance for the next quarter is “over $50 billion.”
There’s a common trap here. On the earnings day, reports stated, “Capital expenditures for the quarter were $35.8 billion, below the market expectation of $36.1 billion,” using the line item “Purchase of Fixed Assets” from the cash flow statement, excluding lease financing. Both figures are correct—they differ by $5.6 billion in lease financing for the quarter. Going forward, whenever you see Microsoft’s capital expenditure numbers, always ask first whether they include lease financing—it’s more useful than questioning the number itself.
Regarding fiscal year 2027, the company made only three statements: capital expenditures are expected to increase year-over-year, exceeding 50 billion in the first fiscal quarter, and free cash flow is projected to remain positive. The $255 billion to $260 billion figure circulating in the market is not company guidance, but rather the prior sell-side consensus estimate before the earnings report, which some media outlets incorrectly presented as guidance.
Can 678 billion in orders cover these investments?
Microsoft reported a balance of $678 billion in commercial remaining performance obligations, an 84% year-over-year increase. Many reports have singled out this figure as evidence of AI demand. It is indeed evidence, but the structure is somewhat softer than it appears.
The bar on the chart didn’t grow gradually—it jumped up within a single quarter of fiscal year 2026, increasing by $233 billion quarter-over-quarter, driven by the contract with OpenAI. Hood provided another perspective on the earnings call: excluding OpenAI, year-over-year growth was 25%. The same pattern applies to commercial orders—reported growth was 10%, but excluding the impact of OpenAI, growth was 18%.
The term also needs to be considered. According to the 10-K and earnings call figures, the weighted average confirmation term for these backlog orders is approximately 2.3 years, with only 30% expected to be recognized within the next 12 months; the remaining 70% are scheduled for after one year, and this 70% has a year-over-year growth rate of 112%. In other words, $678 billion is more like a check payable over several years, while the costs for data centers and GPUs are due this year.
Operating cash flow for the quarter was $55.4 billion, a 30% year-over-year increase and the highest on record. Free cash flow was $19.6 billion, a 23% year-over-year decrease. Looking at the full year, free cash flow for fiscal year 2026 was $67 billion, below $71.6 billion in the prior fiscal year. This is the first time since Microsoft entered this AI investment cycle that annual free cash flow has declined year-over-year.
Depreciation has begun to eat into the income statement. According to the fixed asset footnote in the 10-K, depreciation expense for fiscal year 2026 reached $34.3 billion, up from $15.2 billion two years ago. The gross margin for Microsoft Cloud has declined from 68% a year ago to 65% this quarter, marking four consecutive quarters of decline. This line item is more worth tracking than capital expenditures, since capex can be manipulated through accounting treatments, but once depreciation is on the books, it must be recognized annually.
An unexpected move in the opposite direction
Microsoft's non-GAAP EPS for the quarter was $4.74, below the GAAP figure of $4.81. This is contrary to the trend for most companies, because Microsoft's non-GAAP definition excludes the equity method impact of OpenAI, which resulted in a net gain of $4.963 billion for fiscal year 2026. According to the 10-K, this gain primarily arose from dilution income triggered by Microsoft's ownership stake being diluted during OpenAI's restructuring in October 2025, not from operational earnings. The same line item in the prior fiscal year reflected a net loss of $3.62 billion.
The same footnote also contains an unobtrusive number. For fiscal year 2026, Microsoft’s revenue from its commercial agreement with OpenAI is $24.1 billion, with accounts receivable from OpenAI totaling $6 billion at the end of the period. Microsoft currently holds approximately 25% of OpenAI’s equity, on a converted basis.
This quarter, Microsoft proved it can sell computing power, and the market’s 8% rise acknowledged that it has shifted some of its computing expenditures out of the capital spending category.
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