Microsoft Copilot, Azure consumption and the state of IT budgets are expected subjects on Wednesday’s earnings call.
Updates on Microsoft Copilot and other artificial intelligence products. Eyes on growth in the Azure cloud business. And a look into whether the macroeconomy is affecting IT budgets.
These are some of the biggest subjects to come up Wednesday when Microsoft reports its results for the first quarter of its fiscal year 2026. The quarter ended Sept. 30.
Total revenue should come in at about $75.32 billion, KeyBanc said in an October report. That puts the investment firm below Wall Street expectations of $75.49 billion.
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Microsoft Q1 Earnings Preview
However, KeyBanc predicts better operational efficiency by Microsoft compared with Wall Street, with operating income of $35.12 billion, 50 basis points higher than what Wall Street expects. Free cash flow should come in at $27.28 billion for the quarter.
Copilot deployments could add another $25 billion to Microsoft’s topline trajectory in fiscal year 2026, Wedbush said in an October report. The firm also predicts Microsoft beats its 37 percent Azure growth year-on-year prediction. On-premises migrations, cloud-native applications and new AI workloads coming online are factors helping Azure’s growth.
Deal conversions for broad enterprise-scale AI deployments in the field have been accelerating, according to Wedbush. More Microsoft customers are deploying enterprise AI use cases across multiple verticals.
More than 70 percent of Microsoft’s install base should ultimately leverage its AI functionally in enterprise and commercial environments over the next three years, according to Wedbush. The firm sees Microsoft as the enterprise hyperscale AI frontrunner, even with competition from Amazon Web Services and Google Cloud.
Read on for what to expect from Microsoft’s latest quarterly earnings results.
Microsoft Copilot, AI Applications
Microsoft is still the best-positioned vendor to take incremental share of generative AI spend and IT budgets as workloads move to the cloud, according to Morgan Stanley’s latest quarterly CIO survey, published in October. CIOs like Microsoft’s deep integrations across the software ecosystem and large AI infrastructure investments.
Morgan Stanley’s CIO survey showed that Microsoft ranked top for gaining share in IT and generative AI budgets in the next year and over the next three years. ServiceNow also ranked well in gaining GenAI budget in the short term and Salesforce in the long run. Amazon came in second for gaining share in cloud budgets.
CIOs said they are deploying GenAI mostly in IT operations, followed by marketing, customer service and corporate finance and strategy. Microsoft and Amazon are most expected to win in AI agent strategies, but Google and Salesforce also performed well.
AI and machine learning ranked among the IT projects companies are least likely to cut, according to Morgan Stanley, suggesting more than just hype fueling the current AI surge.
Productivity suites remain a common path to AI implementation, Morgan Stanley said. The investment firm said to look to Unified-Communications-as-a-Service (UCaaS) vendors expanding beyond core capabilities and monetize this new technology era, another technology trend that bodes well for Microsoft, which has the No. 1 UCaaS tool in Teams, even up against pure-play vendors such as Zoom and RingCentral.
Resellers have told KeyBanc that Copilot projects are moving into production, the investment firm said in a report in October. More than 70 percent of respondents are experimenting, piloting and rolling Copilot out in production. That share was down from 84 percent the prior quarter but up from 60 percent in the first quarter of the year.
Discounts for Copilot are hard to come by outside education. Microsoft has made Copilot credits available through prepaid and pay-as-you-go models to help adoption, according to the investment firm. Copilot should help price uplifts in Microsoft 365 commercial cloud.
KeyBanc estimated M365 commercial revenue in the first quarter of $20.9 billion, up 13.8 percent year on year. It predicts similar growth in the 2026 fiscal year.
More than 30 percent of reseller survey respondents said GitHub Copilot gets the most attention from Microsoft customers, up 14 points quarter on quarter. Growth in interest for vibe coding and coding agents should help GitHub Copilot, according to the investment firm.
Microsoft’s productivity and business processes business segment—which includes Microsoft 365 commercial and consumer, LinkedIn and Dynamics 365—could grow about 22 percent, according to KeyBanc.
Microsoft Azure, Cloud Infrastructure, Virtualization
Analysts will want to see big growth numbers for Microsoft’s Azure cloud offer on Wednesday.
Microsoft said Azure is expected to grow 37 percent year on year, but Morgan Stanley put growth closer to 39 percent based in part on Microsoft solution provider feedback and improving GPU capacity. The firm predicts Microsoft puts second fiscal quarter Azure growth at about 38 percent. Azure accelerated last quarter by 4 percentage points, coming in at 39 percent growth year on year.
Azure’s AI business should grow about 19 percent quarter on quarter, Morgan Stanley said, a deceleration from 20 percent the prior quarter and from 41 percent for the same period a year prior. That would mean about $770 million added quarter on quarter. The firm expects about 70 percent of those dollars came from OpenAI from inference, revenue share and other areas.
Partner incentives put into effect over the last few quarters have helped with cloud migration momentum and Azure AI penetration, according to the investment firm. Copilot penetration improved in recent months with more traction in AI building platform Copilot Studio.
Azure growth accelerated the past two quarters in a row, but KeyBanc thinks the cloud product could grow 40 percent year on year, according to an October report by the investment firm.
More than 90 percent of the Microsoft partners that KeyBanc spoke with met or exceeded Microsoft practice expectations, with Azure and Copilot growing well, according to the investment firm. More than 50 percent saw results in line with plans. About 40 percent saw results exceeding plans, up 2 points year on year, down 30 points quarter on quarter.
Meanwhile, departures from legacy virtualization vendors continue to benefit Microsoft and its Hyper V product. Resellers told KeyBanc they have seen average annual VMware price increases of about 60 percent in the past quarter, up from 46.3 percent in the prior survey. About 46 percent of customers seek VMware alternatives, with most responses saying customers want to switch in less than a year. Along with Hyper V, Nutanix is a leading VMware displacer.
More than one-third of respondents said customers recently re-signed their VMware contract or found deployments too complicated and expensive to migrate, meaning the VMware battle will continue over the long run, according to KeyBanc.
The IT Budget Environment
Microsoft usually offers analysts and channel partners a bellwether for IT spending in its quarterly earnings calls.
Morgan Stanley’s most recent CIO survey shows a moderate acceleration in growth expected in calendar year 2026 software budgets, with software taking a larger share of IT budgets. Budgets overall look to grow 21 basis points year on year to 3.8 percent. Still, that does not crack the survey’s 10-year historical average of 4.1 percent growth.
Software should grow about 3.9 percent year on year, an acceleration of 15 basis points and making software the fastest-growing sector measured in the study. CIOs reported that AI and machine learning are at the top of their priority lists, and hyperscalers such as Microsoft are the favored vendor group for deploying AI, large language models (LLMs) and other cutting-edge technologies.
CIOs reported project management tools as an area ripe for vendor consolidation and Microsoft as a potential beneficiary. More than 60 percent of the surveyed CIOs have a company that is standardized on one project management tool, up from 55 percent in the prior year. Another 14 percent said they will standardize on one tool within the next year.
Microsoft Teams and Planner are the most popular project and task management products on the market, with 62 percent of surveyed CIOs saying they use the tools, up from 55 percent share the proper year, according to Morgan Stanley. The share of CIOs using Microsoft Project ticked down from 39 percent in the third quarter of 2024 to 36 percent in the most recent survey.
OpenAI, AI Supply And Demand
Analysts on Wednesday might have questions about Microsoft’s infrastructure investments to meet AI demand.
OpenAI signing a $300 billion contract with Microsoft cloud rival Oracle instead of Microsoft—which has an investment of about $13 billion in the ChatGPT maker—suggests that Microsoft is pushing more resources to enterprise customers, Morgan Stanley said in an October report. The firm looked at the move positively, with Microsoft diversifying its customer base. Oracle, meanwhile, hasn’t been gaining market share in enterprise AI, which might be why it has courted large AI contracts from a handful of customers.
Even though Microsoft prefers to own and operate first-party data centers, it expanded its partnership with CoreWeave and signed deals worth billions of dollars with Nebius and Nscale. Customers have been especially receptive to Microsoft incorporating Anthropic models into Microsoft 365 Copilot, according to Morgan Stanley. Microsoft announced a deal with OpenAI rival Mistral recently, another sign of independence from OpenAI models.
The investment firm will watch for demand signals, commercial bookings and remaining performance obligation trends to back up the theory, according to Morgan Stanley. As Microsoft and OpenAI negotiate the next definitive agreement, Microsoft will likely prioritize intellectual property access and access duration. Microsoft may push for OpenAI to develop a sustainable business model faster to build on Microsoft’s economic interest in the AI lab and to ease OpenAI losses’ effect on Microsoft’s balance sheet, according to the firm.
OpenAI is expected to hit $13 billion, the overall value of the investment, at the end of fiscal year 2026, which should help Microsoft from an accounting perspective. Microsoft can recognize OpenAI training revenue as actual revenue once it hits the initial agreement cap, according to Morgan Stanley. Overall, the OpenAI investment could cost Microsoft $6.7 billion in net income for fiscal year 2026.
Supply constraints getting in the way of AI demand is no longer at the semiconductor level, with data center space, power and infrastructure now greater constraints with longer planning cycles.
Microsoft expects to spend more than $30 billion in capital expenditures in the first fiscal quarter, according to Morgan Stanley. It expects fiscal year 2026 CapEx to come in between $89 billion and $139 billion. Fiscal year 2026 CapEx growth, including capital years, should grow about 40 percent year on year to $121 billion, ahead of the Wall Street consensus of $119 billion.
Microsoft Security Updates
Microsoft executives might want to update analysts on Wednesday’s call on progress in its sizable security tools business, especially with cybersecurity a likely part of the IT budget to resist any potential economic downturns.
Microsoft channel partners saw endpoint security, data security and identity security as key drivers of license upgrades to the more expensive E3 and E5, according to an October report by Morgan Stanley.
Resellers also told KeyBanc about security success in the quarter, with some interest and growing adoption of Microsoft’s secure access service edge (SASE) products, according to the investment firm. Resellers still see Microsoft taking share in the identity and access management (IAM) market, where its Entra ID competes with companies including Okta.
Less positive results for Microsoft’s security business from KeyBanc’s reseller survey include Palo Alto Networks surpassing the vendor this quarter for top consolidator in security spend, according to KeyBanc. Customers also continue to cite security issues, along with cost, as a hindrance to AI adoption.
