Image source: The Motley Fool.

Date

  • Wednesday, July 30, 2025, at 9:30 p.m. ET

Call participants

  • Chairman and Chief Executive Officer — Satya Nadella
  • Chief Financial Officer — Amy Hood
  • Chief Accounting Officer — Alex Jolla
  • Corporate Secretary and Deputy General Counsel — Keith Dolliver
  • General Manager, Investor Relations — Jonathan Neilson

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

  • Total revenue-- $76.4 billion in revenue for fiscal Q4 2025, up 18% in constant currency, exceeding internal expectations.
  • Operating income-- Operating income was over $128 billion for fiscal 2025, up 17% year over year, with a company-wide operating margin of 45% for fiscal Q4 2025. Operating margin increased two points year over year, reaching 45%.
  • Earnings per share-- $3.65 for fiscal Q4 2025. Earnings per share increased 22% in constant currency.
  • Microsoft Cloud revenue-- $46.7 billion in Microsoft Cloud revenue for fiscal Q4 2025, up 25% in constant currency and ahead of guidance.
  • Azure revenue-- Azure surpassed $75 billion in annual revenue for fiscal 2025, up 34% year over year, with Azure and other cloud services revenue up 39% in fiscal Q4 2025.
  • Commercial bookings-- Commercial bookings surpassed $100 billion for the first time in fiscal 2025, increasing 30% in constant currency. Contracted remaining performance obligation was $368 billion as of fiscal Q4 2025, up 35% in constant currency.
  • Productivity and Business Processes revenue-- $33.1 billion in revenue from Productivity and Business Processes for fiscal Q4 2025, up 14% in constant currency, led by Microsoft 365, Dynamics 365, and LinkedIn contributions.
  • Microsoft 365 commercial cloud revenue-- Increased 16% in constant currency for fiscal Q4 2025, with seat growth of 6% year over year and installed base expansion across customer segments.
  • Dynamics 365 revenue-- Increased 21% in constant currency for fiscal Q4 2025, delivering growth across all workloads.
  • LinkedIn revenue-- Rose 8% in constant currency for fiscal Q4 2025, with growth across all businesses in fiscal 2025, but noting hiring market weakness in Talent Solutions.
  • More Personal Computing revenue-- $13.5 billion for fiscal Q4 2025, up 9%, driven by Windows OEM and Xbox content and services.
  • Gaming revenue-- Gaming revenue increased 10%, with Xbox content and services revenue up 12% in constant currency for fiscal Q4 2025. Game Pass annual revenue was nearly $5 billion for fiscal 2025.
  • Gross margin (company)-- 69%, down one point year over year in fiscal Q4 2025, reflecting a sales mix shift to Azure and lower cloud gross margin from AI infrastructure investment.
  • Gross margin (Microsoft Cloud)-- 68%, down two points year over year in fiscal Q4 2025, offset partially by efficiency gains in Azure and Microsoft 365.
  • Paid Microsoft 365 consumer subscribers-- Paid Microsoft 365 consumer subscribers grew 8% for fiscal 2025.
  • Operating expenses-- Operating expenses increased 5% in constant currency.
  • Headcount-- Remained relatively unchanged year over year as of fiscal Q4 2025.
  • Capital expenditures-- Capital expenditures were $24.2 billion for fiscal 2025, including $5 billion of finance leases in fiscal Q4 2025. Over half was allocated to long-lived assets supporting future monetization, as stated by management on the fiscal Q4 2025 earnings call.
  • Free cash flow-- Free cash flow was $25.6 billion for fiscal 2025, supported by strong cloud billing and collections in fiscal Q4 2025.
  • AI product adoption-- Microsoft 365 Copilot achieved the largest quarter of seat adds since launch in fiscal Q4 2025. GitHub Copilot Enterprise customers grew 75% quarter over quarter.
  • Data center capacity-- Over two gigawatts of new capacity stood up in the past twelve months, with total exceeding 400 data centers across 70 regions as of fiscal Q4 2025.
  • Azure AI Foundry adoption-- Over 14,000 customers are using the Foundry agent service as of fiscal Q4 2025. 80% of the Fortune 500 already use Foundry.
  • Outlook for fiscal 2026-- Expectation for double-digit revenue and operating income growth for fiscal 2026, operating margins to remain relatively unchanged, and an effective tax rate of 19%-20% for fiscal 2026.
  • Q1 guidance-- Anticipate over $30 billion in capital expenditures for fiscal Q1 2026 and Microsoft Cloud gross margin percentage of approximately 67%, driven by continued AI infrastructure scaling.

Summary

Microsoft(MSFT -1.25%) reported broad segment outperformance, highlighted by a 23% increase in Microsoft Cloud annual revenue for fiscal 2025 and sustained expansion in Azure, Copilot adoption, and data center capacity. Management stated, "We saw accelerating growth from migrations again this quarter," referencing high-profile migration wins such as Nestle during the quarter and indicating migration activity as a key Azure tailwind. Fiscal year-end commercial bookings exceeded $100 billion for the first time in fiscal 2025, supported by a 35% rise in total remaining performance obligations in fiscal Q4 2025 and increasing contract value, while capital investments scaled to address ongoing capacity constraints despite significant capacity coming online. Guidance for fiscal 2026 projects double-digit revenue and operating income growth, moderated capital expenditure growth compared to fiscal 2025, but management cautions Microsoft Cloud gross margin percentage will decline as AI infrastructure scaling persists, with guidance indicating this trend for fiscal Q1 2026.

  • Hood projected, "expect our fiscal 2026 effective tax rate to be between 19%-20%," guiding toward a higher effective tax rate versus fiscal 2025.
  • Management expects fiscal Q1 2026 capital expenditures to exceed $30 billion. Commercial remaining performance obligation increased to $368 billion as of fiscal Q4 2025.
  • Nadella underscored, "Every Azure region is now AI-first," emphasizing the company's full-stack AI infrastructure as a continued point of competitive differentiation and strategic investment.
  • Customers created three million agents using SharePoint and Copilot Studio during fiscal 2025, illustrating rapid diffusion of agent-based productivity applications.

Industry glossary

  • Commercial bookings: The total value of all contracts signed during the quarter, including renewals and new business, that have a cash or billings impact in future periods.
  • Commercial remaining performance obligation (CRPO): The aggregate contracted revenue that is yet to be recognized over the remaining contract term.
  • ARPU: Average revenue per user, a metric measuring the average revenue generated per user or seat.
  • Ex-TAC: Revenue measured excluding traffic acquisition costs that are paid to partners such as search or ad providers.
  • Copilot: Microsoft's generative AI-powered productivity application suite offered across 365, GitHub, and other surface areas.
  • Agent: An autonomous or semi-autonomous AI application configured to complete complex tasks across Microsoft's software and cloud ecosystem.
  • Fabric: Microsoft’s integrated data and analytics platform supporting AI-driven workloads across cloud and hybrid environments.

Full Conference Call Transcript

Jonathan Neilson: On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alex Jolla, Chief Accounting Officer; and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Corporation Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Corporation Investor Relations website. We provide outlook commentary on today's call. On this call, we will discuss certain non-GAAP items.

The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid in further understanding the company's fourth quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations.

Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Corporation Investor Relations website. During this call, we will be making forward-looking statements, predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ because of factors discussed in today's earnings press release, and the comments made during this conference call and in the Risk Factors section of our Form 10-Ks, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to Satya.

Satya Nadella: Thank you, Jonathan. It was a very strong close to what was a record fiscal year for us. All up, Microsoft Cloud surpassed $168 billion in annual revenue, up 23%. The rate of innovation and the speed of diffusion is unlike anything we have seen. To that end, we are building the most comprehensive suite of AI products and tech stack at massive scale. And to provide more context, I want to walk up the stack starting with Azure. Azure surpassed $75 billion in annual revenue, up 34% driven by growth across all workloads. We continue to lead the AI infrastructure wave and took share every quarter this year.

We opened new data centers across six continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers. We stood up more than two gigawatts of new capacity over the past twelve months alone, and we continue to scale our own data center capacity faster than any other competitor. Every Azure region is now AI-first. All of our regions can now support liquid cooling, increasing the fungibility and the flexibility of our fleet.

And we are driving and riding a set of compounding S-curves across silicon systems and models to continuously improve efficiency and performance for our customers. Take, for example, the GBD 4.0 family of models, which have the highest volume of inference tokens. Through software optimization alone, we are delivering 90% more tokens for the same GPU compared to a year ago. Beyond the AI fleet, we continue to build our commercial cloud to address customers' unique data residency and sovereignty requirements. This quarter, we introduced the Microsoft Sovereign Cloud, the industry's most comprehensive solution spanning both public and private cloud deployments. All of this innovation is driving our strong results. We saw accelerating growth from migrations again this quarter.

Nestle, for example, migrated more than 200 SAP instances, 10,000 plus servers, and 1.2 petabytes of data to Azure with near-zero business disruption. That makes it one of the largest and most successful migrations in business history. The next big accelerator in the cloud will be quantum, and I'm excited about progress. In fact, earlier this month, we announced the world's first operational deployment of a level two quantum computer in partnership with Atom Computing. This is how we will continue to think and make investments with decade-long arcs while making progress every quarter. The next layer is data, which is foundational to every AI application.

Microsoft Fabric is becoming the complete data and analytics platform for the AI era, spanning everything from SQL to NoSQL to analytics workloads. It continues to gain momentum with revenue up 55% year over year, and over 25,000 customers. It's the fastest-growing database product in our history. FabricOne expands all databases and clouds, including semantic models from Power BI, and, therefore, it is the best source of knowledge and grounding for AI applications and context engineering. Azure Databricks and Snowflake on Azure both accelerated as well. Cosmos DB and Azure PostgreSQL are both powering mission-critical workloads at scale. OpenAI, for example, uses Cosmos DB in the hot path of every chat GPT, storing chat history, user profiles, and conversational state.

And Azure PostgreSQL stores metadata critical to the operation of chat GPT as well as OpenAI's developer APIs. This year, we launched Azure AI Foundry to help customers design, customize, and manage AI applications and agents at scale. Foundry features best-in-class tooling, management, observability, and built-in controls for trustworthy AI. Customers increasingly want to use multiple AI models to meet their specific performance, cost, and use case requirements. And with Foundry, they can provision inferencing throughput once and apply it across more models than any other hyperscaler, including models from OpenAI, DeepSea, Meta, x AI's Grok, and very soon, Black Forest Labs and Mistral AI.

We sim-shipped 15 models from OpenAI alone on Foundry this year, providing same-day access to state-of-the-art models deeply integrated with our infrastructure and tools. And we are seeing accelerated adoption of our new Foundry agent service, which is now being used by 14,000 customers to build agents that automate complex tasks. For example, Nasdaq is using Foundry to build agents that help customers prepare for board meetings, cutting prep time by up to 25%. All up, 80% of Fortune 500 already use Foundry, and when we look narrowly at just the number of tokens served by Foundry API, we processed over 500 trillion this year, up over seven times.

This is a good indicator of true platform diffusion beyond a few head apps and services. Talking about the app layer, these applications are becoming embedded in our daily work and life. Our family of Copilot apps has surpassed 100 million monthly active users across commercial and consumer. And when you take a broader look at the engagement of AI features across our products, we have over 800 million monthly active users. Microsoft 365 Copilot is becoming the new way to organize, work, and workflow and work artifacts. We rolled out our biggest update to Microsoft 365 Copilot to date this quarter, bringing together chat, search, create notebooks, as well as agents into one intuitive scaffolding.

With this innovation and continued product improvements, we are seeing real momentum. Customers continue to adopt Copilot at a faster rate than any other new Microsoft 365 suite with strong usage intensity as shown by our week-over-week retention. And we saw the largest quarter of seat ads since launch with a record number of customers returning to buy more seats. Barclays, for example, will roll out Microsoft 365 Copilot to 100,000 employees globally following a successful initial deployment to 15,000. UBS is expanding its deployment to all of its employees after initially rolling it out to 55,000 of them. And Adobe, KPMG, Pfizer, Wells Fargo, all purchased over 25,000 seats this quarter.

Tens of thousands of organizations have already used our researcher and analyst deep reasoning agents in the first weeks of availability, and we have introduced group-level agents in teams like facilitator and interpreter, which generate real-time translation and notes in meetings. Hundreds of partners like Adobe, SAP, ServiceNow, and Workday have built their own third-party agents that integrate with Copilot and Teams. We are also seeing more customers use Copilot Studio to Microsoft 365 Copilot and build their own agents. This year, customers created 3 million agents using SharePoint and Copilot Studio. And with Copilot tuning, they can easily create agents fine-tuned on their company's data workflow and style that reflect their unique tone, language, and expertise.

We're also seeing great traction among specific roles and functions starting with developers. GitHub Copilot continues to have great momentum in IDE with agent mode and new form factors like coding agent, which is capable of asynchronously executing developer tasks. We have 20 million GitHub Copilot users. GitHub Copilot Enterprise customers increased 75% quarter over quarter. As companies tailor Copilot to their own code bases. And 90% of the Fortune 100 now use GitHub Copilot. More broadly, GitHub usage and repos are seeing explosive growth because of AI. AI projects on GitHub more than doubled over the last year.

The surge in wide coding projects and AI coding agents, whether it is ClaudeCode, Codex, Cursor, or GitHub Copilot, are generating more pull requests and more repos on GitHub. And our code review agent is being used heavily across the platform performing millions of code reviews each month. In health care, we had a breakout year for Dragon Copilot. Customers used our ambient AI solutions to document over 13 million physician-patient encounters this quarter, up nearly seven times year over year. For example, at Mercy Health System, more than a thousand physicians are already using Copilot to reduce administrative burden so that they can focus on providing better care.

They have saved more than 100,000 hours to date and plan to expand to all 5,000 providers. As one physician put it, the best thing to happen to my practice in ten years. And in security, we were the first in the industry to introduce agents to help defenders autonomously handle high-volume security and IT tasks. More broadly, AI is driving a fundamental change in the biz app market as customers shift from legacy systems to agentic business applications. Dynamics 365 took share this year. And we are winning customers in every industry, like Verizon with sales, Domino's Pizza Group with ERP, 1-800-Flowers with contact center. When it comes to consumer apps, we are innovating across all surfaces.

In fact, on Monday, we introduced Copilot mode in Edge. It's especially exciting to see the innovation coming back to browsers. Copilot mode brings together Copilot composer, chat, discover, search, and actions to build the next generation of browser for the AI age. Copilot consumer app also continues to see strong growth in engagement and successful sessions. And we are bringing Copilot to every Windows 11 PC. With Copilot Vision, you can share your screen with Copilot and get real-time insights and assistance on anything. And we are well-positioned as we approach Windows 10 end of support in October, thanks to Windows 11 and Copilot plus PCs, which offer customers compelling security as well as AI value.

Talking about security, it underlies our cloud and AI infrastructure as well as our Copilot and agents. We have launched over 100 new capabilities over the past year. Just last week, we added a modern data lake to our SIM, Microsoft Sentinel, bringing together customer data across our first-party tools, as well as third-party ecosystem over 350 connectors. We're also extending the system's customers already use for governance, identity, security, and management to protect every AI agent. Entra now extends identity permissions policies and controls to agents, Defender secures nearly 2 million general AI apps. Purview is used by three-quarters of the Microsoft 365 Copilot customers to protect their data.

And all up, we now have nearly 1.5 million security customers and continue to take share across all major categories we serve. Before I wrap, I want to talk about two consumer businesses of ours with massive end-user reach, LinkedIn and Xbox. LinkedIn is home to 1.2 billion members with four consecutive years of double-digit member growth. All up, comments on LinkedIn rose over 30%, and video uploads increased over 20% this year. We continue to bring AI to every part of LinkedIn experience, introducing agents across hiring as well as 500 million monthly active users across platforms and devices.

We are now the top publisher on both Xbox and PlayStation this quarter with successful launches of Forza Horizon 5 and Oblivion Remastered. The Call of Duty franchise has never been stronger. 50 million people have played Black Ops 6. Total hours surpassed 2 billion. Minecraft saw record monthly active usage and revenue this quarter thanks in large part to the success of the Minecraft movie. And we have nearly 40 games in development. So much, much more to come. We surpassed over 500 million hours of gameplay streamed via the cloud this year and Game Pass annual revenue was nearly $5 billion for the first time.

In closing, we are going through a generational tech shift with AI, and I have never been more confident in my opportunity to drive long-term growth and define what the future looks like. With that, let me turn it over to Amy to walk through our financial results as well as the outlook.

Amy Hood: Thank you, Satya, and good afternoon, everyone. This year, we delivered over $281 billion in revenue, up 15% year over year, which reflects the broad strength of our products and services. Operating income was over $128 billion, up 17% year over year as we invested against the expansive opportunity ahead. And in our largest quarter of the year, we significantly exceeded expectations with strong execution by our sales and partner teams. As Satya shared, innovating faster than ever to deliver new value to our customers. This quarter, revenue was $76.4 billion, up 18% in constant currency.

Gross margin dollars increased 15% in constant currency, while operating income increased 22% in constant currency, and earnings per share was $3.65, an increase of 22% in constant currency. For the first time, commercial bookings were over $100 billion, increasing 30% in constant currency, on a strong prior year comparable. Strong execution across our core annuity sales motions including healthy renewals, as well as an increase in the number of $10 million and $100 million plus contracts for both Azure and Microsoft 365 helped drive these results. Commercial remaining performance obligation increased to $368 billion, up 35% in constant currency. Roughly 35% will be recognized in revenue in the next twelve months, up 21% year over year.

The remaining portion, recognized beyond the next twelve months, increased 49%. And this quarter, our annuity mix was again 98%. FX was roughly in line with expectations on total company revenue. Segment level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $46.7 billion, ahead of expectations and grew 25% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 68%, down two points year over year from the impact of scaling our AI infrastructure, partially offset by continued efficiency gains in Azure and Microsoft 365 commercial cloud.

Company gross margin percentage was 69%, down one point year over year, driven by sales mix shift to Azure, and the lower Microsoft Cloud gross margin noted earlier. Operating expenses increased 5% in constant currency, and operating margins increased two points year over year, to 45%. Better than expected revenue growth, coupled with a focus on operating efficiently, drove the margin expansion. At a total company level, headcount at the June was relatively unchanged, year over year. Now to our segment results. Revenue from Productivity and Business Processes was $33.1 billion and grew 14% in constant currency, better than expected, driven by Microsoft 365 products and cloud services and Microsoft 365 consumer products and cloud services.

Microsoft 365 commercial cloud revenue was ahead of expectations, and increased 16% in constant currency with two points of benefit from in-period revenue recognition. Business trends remained relatively stable to the prior quarter when excluding the in-period revenue recognition. With ARPU growth again driven by E5 and Microsoft 365 Copilot. Paid Microsoft 365 commercial seats grew 6% year over year, with installed base expansion across all customer segments. Though primarily in our small and medium business, and frontline worker offerings. Microsoft 365 commercial products revenue increased 7% in constant currency, ahead of expectations to higher than expected Office 2024 transactional purchasing.

Microsoft 365 consumer cloud revenue was better than expected, increasing 20% driven by ARPU growth following the January price increase and subscriber growth of 8%. LinkedIn revenue increased 8% in constant currency, with growth across all businesses. Though Talent Solutions continues to be impacted, by weakness in the hiring market. Dynamics 365 revenue increased 21% in constant currency with strong execution in our core annuity sales motions, leading to growth across all workloads. Segment gross margin dollars increased 15% in constant currency, and gross margin percentage increased slightly. Driven by the efficiency gains noted earlier, even as we deliver more AI features across our products and scale our AI infrastructure.

Operating expenses increased 6% in constant currency, and operating income increased 19% in constant currency. Next, the intelligent cloud segment. Revenue was $29.9 billion and grew 25% in constant currency, ahead of expectations driven by Azure, and our on-premises server business. In Azure and other cloud services, revenue grew 39%. Significantly ahead of expectations driven by accelerated growth in our core infrastructure business, primarily from our largest customers. As a reminder, new cloud and AI workloads are built and scaled. Using the breadth of our services. Revenue from Azure AI services was generally in line with expectations. And while we brought additional data center capacity online this quarter, demand remains higher than supply.

In our on-premises server business, revenue decreased 3% in constant currency, ahead of expectations, primarily driven by transactional purchasing which also has higher in-period revenue recognition. Enterprise and partner services revenue increased 6% in constant currency, with growth in enterprise support services, partially offset a decline in industry solutions. Segment gross margin dollars increased 16% in constant currency, and gross margin percentage decreased four points year over year, driven by scaling our AI infrastructure, partially offset by Azure efficiency gains noted earlier. Operating expenses increased 4% in constant currency, and operating income grew 23%. Now to more personal computing. Revenue was $13.5 billion and grew 9%. Exceeding expectations primarily due to Windows OEM as well as Xbox content and services.

Windows OEM and devices revenue increased 3% year over year, ahead of expectations as inventory levels remained elevated. Search and news advertising revenue ex-TAC increased 20% in constant currency, driven by continued growth both volume and revenue per search. As well as roughly eight points of favorable impact from third-party partnerships including the benefit of a low prior year comparable. And in gaming, revenue increased 10%. Xbox content and services revenue increased 12% in constant currency, driven by better than expected performance from first-party content and Xbox Game Pass. Segment gross margin dollars increased 15%. Gross margin percentage increased three points year over year with improvement across all businesses. Operating expenses increased 3% in constant currency.

Operating income increased 33% in constant currency, driven by continued prioritization, of higher margin opportunities. Now back to total company results. Capital expenditures were $24.2 billion including $5 billion of finance leases, where we recognize the full value at the time of lease commencement. Cash paid for PP&E was $17.1 billion. The difference is primarily due to finance leases. More than half our spend was on long-lived assets, will support monetization over the next fifteen years and beyond. The remaining spend was primarily for servers, both CPUs and GPUs, and driven by strong demand signals. Cash flow from operations was $42.6 billion up 15%, driven by strong cloud billings and collections, partially offset by higher supplier payments.

And this quarter, free cash flow was $25.6 billion. Other income and expense was negative $1.7 billion primarily due to losses on investments accounted for under the equity method. Our effective tax rate, approximately 17%. And finally, we returned $9.4 billion to shareholders through dividends and share repurchases, bringing our total cash return to shareholders to over $37 billion for the full fiscal year. Now moving to our outlook. My commentary for both the full year and next quarter is on a US dollar basis unless specifically noted otherwise. Let me start with some full year commentary for FY '26. First, FX.

Assuming current rates remain stable, we expect FX to increase full year revenue growth and COGS growth by approximately two points and to increase operating expense growth by one point. Next, building on the strong momentum we saw this past year, we expect to deliver another year of double-digit revenue and operating income growth in FY '26. We will continue to invest against the expansive opportunity ahead across both capital expenditures and operating expenses, given our leadership position in commercial cloud, strong demand signals for our cloud and AI offerings, and significant contracted backlog. Capital expenditure growth, as we shared last quarter, will moderate compared to FY '25 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. We remain focused on delivering revenue growth increasing our operational agility. And as a result, we expect operating margins to be relatively unchanged year over year. And finally, expect our FY '26 effective tax rate to be between 19-20%. Now to our outlook for the first quarter. Based on current rates, we expect FX to increase total revenue growth by two points. Within the segments, we expect FX to increase revenue growth by roughly three points in productivity and business processes and roughly one point in intelligence cloud and more personal computing.

We expect FX to increase COGS and operating expense growth, by roughly one point. In commercial bookings, we expect healthy growth on a growing X3 base. Bookings growth will again be driven by strong execution across our core annuity sales motions and long-term commitments to our platform. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should be roughly 67%, down year over year driven by the impact of continuing to scale our AI infrastructure. We expect Q1 capital expenditures to be over $30 billion driven by the continued strong demand signals we see.

As a reminder, there can be quarterly spend variability from cloud infrastructure build-outs, and the timing of delivery of finance leases. Next, to segment guidance. In productivity and business processes, we expect revenue of $32.2 to $32.5 billion or growth of 14% to 15% with roughly three points of benefit from FX as noted earlier. In Microsoft 365 Commercial Cloud, we expect revenue growth to be between 13% and 14% in constant currency, with business trends that remain relatively stable compared to the prior quarter. ARPU growth will again be driven by E5 and Microsoft 365 Copilot. Microsoft 365 commercial products revenue growth should be in the mid to high single digits.

As a reminder, Microsoft 365 commercial products includes both the Windows commercial on-premises components of Microsoft 365 suites, and office transactional purchasing, both of which can be variable due to in-period revenue recognition dynamics. Microsoft 365 consumer cloud revenue growth should be in the low twenties driven by the January price increase. For LinkedIn, we expect revenue growth in the high single digits. And in Dynamics 365, we expect revenue growth to be in the high teens with continued growth across all workloads. For intelligent cloud, we expect revenue of $30.1 to $30.4 billion or growth of 25% to 26%, with roughly one point of benefit from FX as noted earlier.

Revenue will continue to be driven by Azure, which can have quarterly variability in year-on-year growth rates depending on the timing of capacity delivery, and when it comes online, as well as from in-period revenue recognition, depending on the mix of contracts. In Azure, we expect Q1 revenue growth of approximately 37% in constant currency, driven by strong demand for our portfolio of services on a significant base. Even as we continue bringing more data center capacity online, we currently expect to remain capacity constrained, through the first half of our fiscal year. In our on-premises server business, we expect revenue to decline in the low to mid single digits, with the ongoing customer shift to cloud offerings.

In more personal computing, we expect revenue to be $12.4 to $12.9 billion. Windows OEM and devices revenue should decline in the mid- to high single digits. We expect the elevated inventory levels at the end of Q4 to come down through the quarter in Windows OEM, although the range of potential outcomes remains wider than normal. Devices revenue should decline. Search and news advertising ex-TAC revenue growth should be in the low to mid teens, down sequentially as growth rates normalize, following the benefit from third-party partnerships noted earlier. Growth will continue to be driven by volume, and revenue per search across Edge and Bing. Overall search and news advertising revenue growth should be in the low double digits.

And in gaming, we expect revenue to decline in the mid to high single digits against a strong prior year comparable. We expect Xbox content and services revenue to decline in the mid single digits. Now back to company guidance. We expect COGS of $24.3 to $24.5 billion or growth of 21% to 22%. And operating expense of $15.7 to $15.8 billion or growth of 5% to 6%. Other income and expense is estimated to be negative $1.3 billion primarily due to investments accounted for under the equity method. As a reminder, we do not recognize mark-to-market gains or losses on equity method investments. And lastly, we expect our Q1 effective tax rate to be between 19-20%.

In closing, we finished the year with double-digit revenue and operating income growth. And exceeded the FY '25 operating margin commitment we shared a year ago. Our focus remains on investing in security, quality, an AI platform and product innovation that delivers value and opportunity to our customers. We are excited for FY '26. With that, let's go to Q and A, Jonathan.

Jonathan Neilson: Thanks, Amy. We'll now move over to Q and A. Out of respect for those on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions?

Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1 on your telephone keypad. And the confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.

Keith Weiss: Thank you guys for taking the question and congratulations on a fantastic end to FY 2025. I've been covering Microsoft Corporation for a while. I don't think I've ever seen a quarter where, like, everything came together this well. So congratulations on that.

Satya Nadella: Thank you for calling Income Conferencing. The next available operator will be with you momentarily. On. So these are workload results that are invaluable for us to learn to build both the products as well as the platform. And then broadly they or rather over time, they will be brought to few. In fact, one of the things that Amy and I track is not just the head app usage, but also what's the sort of all the tier two applications that are being built. That's sort of that's speaks a little bit, Keith, to, I think, your question.

Is as long as we have head apps shaping the platform, and then after that, we have the broad diffusion happen, which in some sense with both of those is what we're seeing. So I feel very good about being in decent standing going forward.

Jonathan Neilson: Thanks, Keith. Operator, next question, please.

Operator: The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed.

Mark Moerdler: Thank you. I also give you my congratulations. Amazing I didn't know how you were gonna beat last quarter. And you did it. So congratulations. And thank you for taking my question. Satya and Amy, we're now two plus years since the Jaina revolution. Adoption is still early and ramping. What do you think is the best way that software companies are gonna be able to monetize AI for SaaS? Do you believe there are differences in monetization for horizontal, more general apps like Microsoft 365 Copilot or dynamic CRM Copilot versus very targeted capacities on the AgenTex side? And, also, how should you think about the trajectory of SaaS AI margins over the long term? Thank you.

Satya Nadella: Yeah. Start, and Amy, you should feel free to add. I mean, if I just broaden out beyond just SaaS as a category, I think just like, you know, the server to cloud transition, was an expansion of essentially usage of servers. That is essentially what happened with the cloud, right, which is we did a bunch of servers except that the expertise required, the capital required, the time required to bring up servers, build it out, scale it, was just all hard. And so therefore, the market was a certain size, whereas with the cloud, you could sort of buy it with flexibility, you could burst, and you could spin up and spin down. The expertise required came down.

So it was just orders of magnitude. That's what happening. So if you sort of even subscribe to this point of view that intelligence is basically log of compute, that means compute's going to grow and you've got to use it as efficiently as possible to just keep creating, intelligence. Now how does it manifest beyond just the infrastructure? I kind of to Keith's earlier question, talked a little bit about how infrastructure is getting shaped, data layer is getting shaped, the app server is getting built. These are all classic categories of infrastructure. That'll continue, but they will be an order or two of magnitude more.

So literally, like, there in fact, one of the other things we track is every GPU requires storage and compute, that ratio. Is another thing that is really exponential for AI infrastructure. Growth. So when you go to the app layer, the SaaS apps themselves are now building in if effectively agentic and chat interfaces with intelligence. And they're also building autonomous agents. Agents are kind of like applications, like a database application. Perhaps, but they are being used increasingly in app you know, inside of a user interaction. I think a good example is GitHub Copilot. It got started as an you know, code completions on an IDE. Then we added the chat interface to it.

Then we added the agent mode to it. And now we have an autonomous agent, which in fact works completely asynchronous. Right? So all those four things are now part of essentially GitHub. And by the way, it also turns out that every other tool that is also doing any form of coding is adding more and more GitHub reports. If I had to think about GitHub monetization, we have an opportunity around just monetizing GitHub Enterprise. And then we have the ability to think about GitHub Copilot. And GitHub Copilot, as with all these form factors. And so that's exactly the same thing that's with Microsoft 365. That's the same thing that's happening with Dynamics 365.

So you have to be very open to taking your data tier, your business logic tier, and your UI tier and sort of being more expansive in it. As long as you do that, it's just that usage goes up. And that's what I think shows up in the results.

Amy Hood: And I think, Mark, if you wanted to think about all the things in the layers that you talked about is really we're seeing very similar monetization tools exist in this transition too. Right? There's a per user logic. There's tiers of per user. Sometimes those tiers relate to consumption. Sometimes there's pure consumption models. Think you'll continue to see a blending of these, especially as the AI model capability grows. You'll end up with ways that teams are gonna wanna throttle that usage, use the best models for the best job, and I think the blending of these models will continue to be something we see on the go forward basis.

Mark Moerdler: Thank you. I appreciate it.

Jonathan Neilson: Thanks, Mark. Operator, next question, please.

Operator: The next question comes from the line of Karl Keirstead with UBS. Please proceed.

Karl Keirstead: Okay. Satya, Amy, this is the second quarter in a row of pretty material Azure upside from what sounds like an acceleration in, on-prem to Azure migration activity. I'm just wondering if you can comment on the plethora of customer conversations you've had, whether there are a couple of two or three specific catalysts that are driving that migration? And how durable a trend do you think that is? Thank you.

Satya Nadella: Yeah. I'm just the three things are really one is the migrations. A good example would be what I referenced in my remarks with Nestle, with the SAP instances, they moved along with a lot of the data that's associated with it and a bunch of servers. So that's kind of a classic example. Think whether it's VMware migrations or migrations of SAP or even just our own server migrations, they're pretty healthy. And as it turns out that we're still not anywhere close to the finish line, if at best, maybe in the middle innings of that. The second thing that's also happening is cloud-native applications that are scaling. This is even excluding all of the AI stuff.

Just the classic cloud-native e-commerce company, let's say, these are scaling in a big way. And some of those customers were not on Azure previously, but now they're increasingly there. If they have come for AI perhaps, but they now stay for more than AI. And so to me, that's another thing you see in overall what's happening across the Azure number. And then, of course, there are the new AI workflows. So those are three things that are all, in some sense, building on each other, but that's kinda what's driving our growth.

Karl Keirstead: Got it. Thank you.

Jonathan Neilson: Thanks, Karl. Operator, next question, please.

Operator: The next question comes from the line of Brent Thill with Jefferies. Please proceed.

Brent Thill: Satya, back to the strength across the board in the quarter. Was there anything that jumped out at you or surprised you that you didn't think you were going to see but you did see in the quarter? It just the magnitude of upside, I think, had shocked many here.

Satya Nadella: Yeah. I don't know, Brent, if anything really surprised us. But I think what we are noticing in our own build-out of these AI and in general is the platform is becoming more than here's a model, and here's an API, make some calls. I mean, that's in some sense was a bit of the state of the art maybe even a year ago. Whereas now you have essentially these very stateful app patterns that are emerging that require quite a bit of rethinking of even the app stack. I mean, take even the storage tier stuff. Right?

The degree of sophistication you have and hey, how much of an index do you really want to build by pre-processing so that your prompt engineering or context engineering, as I called, can be better and higher quality. So I think all of that is emerging. So when I look at a product like Azure Search, Fabric, and Cosmos DB, all of the things, the framework around it are just becoming robust to build serious applications. And so that's what I feel great about is the learning curve inside the company, outside the company, the diffusion of the stack. The speed with which that's emerging that you can build applications is much faster.

I always go back and say, hey, when a I don't know. A relational database came out, it took a while for people to build an ERP system, let's say. And this thing we're kind of building pretty sophisticated applications at a very, very fast clip based on, I think, the degree of maturity that's emerging.

Brent Thill: Thanks, Brent. Operator, next question please.

Operator: The next question comes from the line of Raimo Lenschow with Barclays. Please proceed.

Raimo Lenschow: Perfect. Thank you. Congrats from me as well. I had one question around Copilot, and I'm obviously a happy user here at Barclays. If you think about it the one thing that we're all realizing is that Copilot is the AI part, but data is becoming more and more important. And then from there on, we can start thinking about agents. Where is the where what are you seeing in your customer conversations, Satya, about, like, that understanding that Copilot is actually just the starting point, and then from there on, you know, it's really becoming, like, much, much broader. Thank you.

Satya Nadella: Yeah. I think that's right. Even inside of Copilot, I'm sure you're seeing it. Right? You now have analyst and researcher to just talk about two examples. And, of course, people, all the third-party agents. So, yeah, there is a lot more of just not request response. It's about spawning essentially applications that then go to work and come back. But the UI still remains very important, right, even for asynchronous work, to instruct the asynchronous work, you need UI. And to monitor asynchronous work, you need UI. It may be it may not be a chat interface. And of course, you need a way to then inspect what the asynchronous work is.

So even take the example I was giving on GitHub, even if you're not using GitHub Copilot to create the code check-in or the pull request, interestingly enough, we're seeing massive to get a Copilot code review agent even if you used maybe CloudClub, you know, CloudClub or whatever else to write the code. So that's I think what's happening across all of these. So you're absolutely right that you need it starts with some kind of a UI that's more chat-focused, but it quickly goes beyond it. And you see it in Microsoft 365, you see it in Dynamics 365, and you see it in GitHub.

Raimo Lenschow: Thank you.

Jonathan Neilson: Thanks, Raimo. Operator, next question, please.

Operator: The next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.

Kash Rangan: Hi. Thank you very much, Amy. I wanna acknowledge that, I think a few quarters ago, you said that you reached a point in time where you can accelerate Azure while slowing down CapEx. So you did it. But what is the outlook? When I look at the CapEx guidance for the upcoming quarter, certainly, I would view that as a positive indicator of the book of business you have for your cloud services. But how should we think about the shape of the curve of, CapEx vis a vis Azure growth rate in the years ahead, particularly as I listen to Satya's comments, on, the AI stack consuming more and more infrastructure.

Are we at a point where we're gonna have to continue to do this and we magically wait for inference and applications to kick in and they've therefore create a richer gross margin mix. Thank you so much for your comments, and congrats on the quarter.

Amy Hood: Thanks, Kash. Let me back up and first say when you think about the full year comments I've made on CapEx, as well as the Q1 guidance of over $30 billion you first have to ground yourself in the fact that we have $368 billion of contracted backlog we need to deliver, not just across Azure, but, of across the breadth of the Microsoft Cloud. So in terms of feeling good, about the ROI and the growth rates and the correlation I feel very good that the spend that we're making is correlated to basically contracted on the books business.

That we need to deliver and we need the teams to execute at their very best to get the capacity in place. As quickly and effectively as they can. And so when you look we've talked about the growth rate will decline year over year. But at its core, our investments, particularly in short-lived assets, like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And I talked about my gosh, in January and said, I thought we'd be in better supply demand shape by June. And now I'm saying, hope I'm in better shape by December. And that's not because we slowed CapEx.

Even with accelerating the spend and trying to pull leases in and get CPUs and GPUs in the system as quickly as we can we are still seeing demand improve. And so I am not as focused, Cash, on trying to pick a date at which revenue growth and CapEx growth will meet and cross. I'm focused on building backlog, building business, and delivering capacity. Which we are seeing has a good ROI today. In terms of our ability to get that done. So I don't want people to get overly focused on a pivot point because when you're in sort of these expansive moments, picking a data point usually means you're gonna pick to be too conservative.

In terms of market share gain and in terms of winning. And so I tend to put my energy more there.

Satya Nadella: Yeah. I think one of the other things Kash is that I think I said this in the previous earnings as well, which is the difference between a holster and a high scaler is software. And the same is going to be true here. That GPD 4.0 example I gave, is all software, right? The optimization even in the last year. So we know how to use the software skills to take any piece of hardware and make it, you know, multiple x better. And so that's kind of where the yield will come. But as Amy said, while you're really going and building out the plant, you don't wanna sort of serialize it.

You just want to go in parallel on all of these fronts. And that's sort of what will compound over time. And I do think it's important when Platts talks about the software layer, he's talking about in his comments to connect this back to the compounding S-curves. And so I would remind people that is something that we saw through the prior cloud transition. It's how we operated through that one and the same sort of skills and logic done at an even faster pace. Is what will apply the same transition.

Kash Rangan: Sounds very encouraging. Thank you so much.

Jonathan Neilson: Thanks, Kash. Operator, next question, please.

Operator: The next question comes from the line of Michael Turrin with Wells Fargo. Please proceed.

Michael Turrin: Hey, great. Thanks very much for taking the questions and congrats for me as well on the metrics working in concert here. Amy, maybe on margin, impressive to hear expectations for flat operating margin in the upcoming year as you absorb some of the mix shift towards Azure and some of the more AI-focused offerings? Can you speak in more detail just around your ability to manage those trade-offs and offset some of the mix shift? And I'm wondering, specifically just on any productivity gains you're seeing from leveraging AI internally that you'd highlight or anything else you just mentioned in underpinning the full year expectation there? Thank you.

Amy Hood: Thanks, Michael. I think really the area to focus on is when you think about margin, I think sometimes people get a lot of energy around cost control as a driver of margin. The other driver is to focus on making sure you deliver great product that's competitive and innovative and can take share. Because that drives revenue. And revenue itself and revenue growth, as you all know better, even perhaps than I do, is a durable way to see margin improvement. It builds on itself.

That being said, the second thing I would point to is really what I talked to Cash a little bit about before, Satya and I both mentioned it, is applying all of our skill set here to deliver efficiencies. Whether that's at whatever layer of the stack that exists. The S-curves compound, and we are doing that work and we're focused on it at the same time we're doing the build-out. So you'll see improvements there even as we continue, to invest. And then, of course, it's about continuing to have great talent here, focus on products and opportunities where we have the biggest markets. And the most likelihood of success.

And so when we have those three things happen, and the energy is right, and the focus is there, gives me confidence in terms of margin delivery. But make no mistake, starts and ends really with product. Which is what we're really focused on here and delivering that to customers.

Michael Turrin: That all sounds pretty good. Thanks very much.

Jonathan Neilson: Thanks, Michael. That wraps up the Q and A portion of today's earnings call. Thank you for joining us today. We look forward to speaking with you all soon.

Satya Nadella: Thank you. Thank you.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.