$MSFT · Jose Najarro Stocks · 2026-10-28

And now with Andre, here's Tom Lee. He's live right now as we get into Google and Microsoft earnings.

and of course Microsoft had that big layoff announcement as well so Tom Lee is bullish on Microsoft and Google Mr. Mr. Jose,

do you think Google or Microsoft will announce dilution like Meta today?

I want to see backlog for Azure. I want to see backlog for Google. Um, I expect them both to accelerate. And uh specifically speaking to Microsoft, I want to see how that transition from more just pure seatbased revenue to more consumptionbased models is doing for Microsoft 365.

It's just do you think Google and Microsoft can I guess the broader question is what do they have to say to avoid a meta drop? Obviously, not diluting would be nice, but is there something that the street's not expecting in terms of cloud or search, Microsoft Copilot or Azure that can actually change and beat expectations?

As for Microsoft, I mean, couple of quarters ago, Microsoft, I think Azure grew 38%, the street was looking for 39% and this thing got pulled down. So, anything can happen there, but I'm also not it's both of them will just report very good earnings.

I just don't see a scenario where the the reports aren't good.

I mean, Microsoft did have a nice nice runup from the lows. I I think with Microsoft, right, one thing that we haven't seen with Microsoft has been a massive acceleration in cloud, right?

Like we've seen with Google, right? I think Google's last numbers were north of 70%. I forget the actual numbers, but for like Neil mentioned, for Microsoft, we've been stuck for the past three to four quarters on the year-over-year growth of like 37, 38, 39%.

I want Microsoft to finally have a quarter where we kind of break that barrier that that kind of ceiling that we've kind of hit and I think if we get something like 45 I don't know if we have looked at the numbers but if we get a scenario where you kind of break that ceiling of that Ash are growing a lot faster um I think that would be a very um bullish case

>> I completely agree, Emit. I'm surprised that well obviously there's SKH highex but it specifically spiked up even more after that and I'm like that seems so surprising to me if they're going to get to this area of not needing to you know tap more equity in debt markets only by 20 billion more as a reminder this is a company with over $150 billion of debt so there's actually not much more for them to go here I would have thought that Google would have taken or sorry um Micron would have taken a a lot of like the actual AI infrastructure names that people have called cyclical but it's sort of a mixed bag.

I would think the reason why Microsoft might be done in Micron still up is probably also because of the TPU comments. So more let's say companies diversifying away from Nvidia.

Um we have FedEx, T-Mobile, Google, Microsoft, Forinet, KAC, Ford, Carvana, eBay. So we will be covering all the earnings.

Microsoft, I think Microsoft starts at 5, so we're not going to get through all of Microsoft.

Google and Microsoft, I think, are the biggest along with Amazon tomorrow. So future capex expectations, cloud growth, um capex for 2026, those are going to be all the big numbers we're looking for as the collective market cap of these companies is around 8 trillion.

And so there will be a lot of billions moving here after hours.

pump or dump? What do you guys think? Tanner, Google, Microsoft, both dump, both pump.

I don't think too big of a move either direction. I think both go up with Google going up a bit more. I think both going up with Microsoft going up a little more.

Yeah, I think both go up. I think I think if both were to if there's a dump, it's Google because of dilution. There's no dilution. I think Google's fine.

Microsoft, I think, goes up just based on positive free cash flow guidance for 27. Uh they already did the employee layoff thing, which also kind of took out a lot of the I think bad news.

Yeah. But like one has a Google cloud business potentially doubling super profitable. I'm not expecting free cash flow by the way for Google this quarter. Microsoft. Yes.

Microsoft. Yes. Microsoft, I think with free cash flow, they should be fine. In general, I I if these stocks take a hit, it's not I don't think it's going to be because something's wrong with the earnings.

And so, hopefully they set us off for a good trend with big tech and we can see what happens to the market from there.

We got Google, we got Microsoft, we got a bunch of other companies. Microsoft's a little bit later, so we should see some reaction pretty soon.

Maybe a deescalation headline as we get Google and Microsoft here. Microsoft going up up too.

Uh okay. Microsoft first quarter revenue 92 billion versus 90. That's a beat. EPS 489 versus 473. That's a beat. Cloud revenue 63.9 billion versus 61.6. That's a beat. Capex came in lower than expected.

39.3 versus 45. Operating income 45.9 versus 43. You got a quadruple beat for Microsoft.

And the street likes it. Oh boy. Okay, that's the opposite of Microsoft.

That is good for Microsoft.

Microsoft is at 562. That is an all-time high. Wow. Microsoft officially all-time highs. That's up 6%. That's a big move on a $4 trillion company.

Here's the Microsoft coverage right here. Three there. So a sizable beat. You've also got a beat on revenue here. 92.28 billion compared to the roughly 90 billion that analysts had estimated.

And then cloud growth. This is the Azure number. 48%. Street was looking for 45%. So easily beating there.

We can see stock reacting up more than 4% now after hours. Okay, so Microsoft loves it.

But if I could just say my opinion, the trick for me over the last two years has been buy every mag seven fade. like um Microsoft ended up selling off to 300,

Microsoft RPO increased by 73%. We're trying to get some deeper numbers on these two, but looks like RPO is fine.

or is it the reduction in capex like the missing capex from Microsoft? But then again, Google doubled capex, so that should balance things out.

If they lower it, kind of like this Microsoft guide or this Microsoft number in 3Q by four billion, even if it's anything smaller than what they should expected, maybe Google pops and the semis continue to go down.

Microsoft's giving up a lot of its pump. I mean, it's up four, but it was up seven.

Microsoft, we are live now. than 330,000 employees, one of the largest deployments to date in Europe. We're also seeing strong momentum with E7, which brings together Copilot, E5, Entra, and Agent 365.

Thousands of customers in every industry have purchased the suite to date, including Amiders, Black Rockck, Ferve, and New South Wales Health Department and Zeiss. Our business model is expanding from per seat subscriptions to include consumption, expanding our TAM and ARPO.

The subscription brings increasingly capable everyday intelligence to every user. Typically, it funds this, consolidating frontier advances for everyone across the organization.

And as agents take on higher value work, consumption opens up business funded demand with spending tied directly to the value these agents deliver. The number of copilot customers actively consuming credits through usagebased billing grew over 75% over the quarter.

When it comes to software development, all major coding agents have shown up to work on GitHub. Agent generated PRs have increased 6x over the past 6 months and agents now open more than a third of all PRs on the platform.

We are very hard at work on reliability as agentic activity on GitHub source. At GitHub Universe this morning, we shared how we are expanding capacity and rebuilding the core git architecture for the agentic wave.

Also at universe, we announced broad availability of copilot fusion which is all about bringing multimodel orchestration to software development. It delivers frontier level quality up to 40% faster and at up to 77% lower cost.

Credit consumption from Agentic features on GitHub has more than doubled since usagebased billing went into effect. And we're also helping developers secure their code and turn AI generated code into high quality software.

GitHub advanced security revenue increased over 50% year-over-year as customers use its AI capabilities to scan entire repos and fix vulnerabilities in real time. In the business application space, we are extending this vision of C-pilot as the new OS for work, bringing the business logic and capabilities of Dynamics 365 directly into Copilot and helping every organization stand up their own infinite SAS factory.

This quarter, we introduced 30 new co-pilot skills across Dynamics 365, which enables customers to access CRM and ERP capabilities directly in the flow of work. In recruiting, more than 10 million LinkedIn members use our LinkedIn AI powered job search daily and 25,000 customers are using our agentic hiring solutions.

Recruiters using hiring assistant are finding interview quality applicants 33% faster while reviewing 83% fewer profiles to find qualified match. In healthcare, we automated 30 million patient encounters this quarter, up 70% year-over-year, helping clinicians spend less time on administrative work and more time with patients. 10 providers, including Advocate Health, Mass General, Bringingham, Mercy, Inter Mountain Health, and others have used our solutions to document over 1 million encounters each since the beginning of the calendar year.

And in science, our FDE teams are working with customers to use discovery to accelerate scientific progress. A great example is Sang Go Goban, which used discovery to accelerate the development of lowcarbon construction materials.

Underneath our first party agentic experience is a common platform. It

Foundry and improved CPU monetization. Foundry revenue more than tripled year-over-year with upside driven by efficiency gains across our GPU fleet that allowed us to allocate additional capacity to customers as well as higher revenue per token that we benefited from in the quarter.

Across our CPU fleet, engineering work enabled us to identify and monetize underutilized capacity this quarter, helping us serve more of the growing demand with our existing capacity.

The timing of engineering efficiencies like these as well as 3P GPU lease deliveries, our own capacity buildouts and ARPU changes from model mix can create quarterly variability in the year-over-year growth rate.

M365 commercial cloud revenue increased 18% and 19% in constant currency when adjusted for the prior year comparable. That benefited from one point of in period revenue recognition on a reported basis.

Revenue growth was 17% and 18% in constant currency.

Results were ahead of expectations driven by stronger GitHub copilot adoption and usage, partially offset by weaker sales execution in our M365 E3 and standalone SKUs.

We continue to evolve our sales motions to balance those more traditional skew per seat rhythms with the newer premium E7, M365 co-pilot, and usagebased productivity offerings.

Year-over-year growth was driven by both ARPO and Seats. ARPU growth was led by our premium seatbased offerings, including M365 C-pilot, E5, and E7, which has already reached millions of paid seats with additional contribution from usage based offerings, primarily GitHub Copilot.

And C-pilot revenue growth accelerated quarter over-arter with continued adoption across M365, GitHub, and security. Paid M365 commercial seats grew 5% with some impact from the weaker sales execution noted earlier.

Growth was driven by install base expansion across all customer segments though primarily in our SMB and frontline worker offerings.

M365 consumer cloud revenue increased 17% and 16% in constant currency down sequentially as we begin to lap the benefit from the price increase in the prior year.

Productivity and server licensing revenue decreased 3% and 2% in constant currency, primarily driven by a decrease in transactional purchasing as we lap the benefit from product launches in the prior year, partially offset by a greater mix of contracts that carry higher in period revenue recognition.

Industry solutions cloud revenue increased 10% with growth in Dynamics 365 and LinkedIn talent solutions, though booking trends continued to moderate.

And in frontier and support services, revenue increased 4% and 5% in constant currency driven by support. Microsoft cloud gross margin percentage declined year-over-year to 66% driven by sales mix shift to Azure partially offset by product level margin improvements primarily in Azure.

And for this segment, gross margin dollars increased 20% and 21% in constant currency.

Operating expenses increased 10% driven by the R&D investments noted earlier. Operating income grew 24% and 25% in constant currency. And operating margins decreased slightly year-over-year to 53% as strong revenue growth, platform efficiency gains, and focused investments across our portfolio were more than offset by sales mixed shift to Azure.

Now to devices and consumer revenue was 15.5 billion and declined 3%. Search and advertising revenue. XTAC increased 12% and was ahead of expectations driven by higher volume and rate across LinkedIn, Edge, and Bing.

Xbox revenue decreased 2% and Xbox content and services revenue decreased 2% and 1% in constant currency driven by declines in thirdparty content and Xbox Game Pass partially offset by growth in firstparty content.

And Windows OEM and devices revenue decreased 22%. Windows OEM revenue was below expectations and decreased 27% and 28% in constant currency driven by the Windows 10 end of support demand in the prior year.

Inventory draw downs by OEM and channel partners and weaker PC market demand. Inventory levels remain elevated.

Segment gross margin dollars were relatively unchanged year-over-year and operating expenses decreased 3% driven by Xbox partially offset by the continued investments in R&D noted earlier.

Operating income increased 2% and 3% in constant currency and operating margins increased year-over-year to 35% driven by lower amortization of intangible assets from the Activision acquisition partially offset by the impact from a lower mix of Windows OEM revenue.

Based on current rates, we expect FX to have no meaningful impact on total revenue, COGS, or operating expense growth or on revenue growth in either segment.

Starting with segment guidance, we expect revenue from agents in infra to 80.7 billion US or growth of 24 to 25%.

In commercial bookings, we expect healthy growth in our commercial sales motions, though results will be impacted by the significant Azure commitments signed in the prior year.

Timing related to significant Azure commitments like these will result in material volatility in bookings, making quarterly growth rates less indicative of underlying sales execution.

In Azure, we expect revenue growth of 49 to 50% in constant currency with continued efficiency gains across our CPU and GPU fleet, helping to offset some 3PG GPU as a service contracts that have been delayed to H2.

Customer demand continues to exceed available supply. And looking beyond Q2, year-over-year growth will continue to reflect the timing and scale of engineering efficiencies delivered in the quarter and new capacity ads as well as a strong prior year comparable that included accelerating growth in the second half.

In M365 commercial cloud, we expect growth of approximately 19% in constant currency with FX expected to reduce reported growth by less than a point. We expect continued momentum across our premium per seed offerings and usagebased offerings along with some improvement in execution across E3 and our standalone SKUs.

Growth will be driven primarily by ARPO with additional contribution from seats and we continue to expect revenue growth to accelerate through the year. M365 consumer cloud revenue should grow in the low teens down sequentially as we lap the price impact noted earlier.

Productivity and server licensing revenue should decline in the mid to high single digits down sequentially due to a lower expected mix of contracts that carry higher in period revenue recognition.

Quarterly growth can vary materially based on contract mix product launch timing and other transactional purchasing trends. In industry solutions cloud, we expect revenue growth to be in the mid to high single digits with continued impact from the bookings trends noted earlier.

And in frontier and support services, we expect revenue to grow in the low to mid single digits. Microsoft cloud gross margin percentage should be roughly 65% down year-over-year as continued improvement in product level margins is more than offset by sales mix shift to Azure.

In devices and consumer, we expect revenue to be 15.9 to 16.4 billion US.

Search and advertising revenue x tax growth should be in the low double digits driven by consistent trends in rate and volume with overall search and advertising revenue expected to grow at a similar rate.

And in Xbox content and services, we expect revenue growth to be in the mid to high single digits up sequentially driven by the timing of content launches across both third and first party.

With content launch patterns through the year, we expect growth to be the strongest in the second quarter with some deceleration in Q3 and further moderation in Q4.

Hardware revenue in Q2 should decline year-over-year. Windows OEM and devices revenue should decline in the mid30s. Growth will continue to be impacted by elevated inventory levels, PC market demand, and a prior year comparable that benefited from Windows 10 end of support.

As in prior quarters, the range of potential outcomes remains wider than normal. We expect these trends to continue through the rest of the fiscal year. Therefore, at a total company level, revenue should be between 96 and 97.1 billion US or growth of 18 to 19%.

We expect COGS at 32.7 to 32.9 billion US or growth of 26 to 27% and operating expense of 18.5 to 18.6 6 billion US or growth of 9% driven by continued investment in R&D compute capacity and talent.

Our cost guidance across both COGS and OPEX includes an estimate for the recently announced employee voluntary exit offer. Operating margins should be down slightly year-over-year excluding any impact from our investments in OpenAI.

Other income expense is expected to be roughly negative $300 million as interest income will be more than offset by interest expense which includes the interest payments related to data center finance leases and we expect our Q2 effective tax rate to be approximately 20%.

Next capital expenditures in Q2 we expect capex spend will be over $50 billion. Therefore for the calendar year spend should be approximately $170 billion due to the three peak capacity delays noted earlier.

In the second half of the fiscal year, we currently expect capex spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs and GPUs, as well as the 3P capacity deliveries that shifted to H2.

And as we continue to improve the efficiencies of our infrastructure, each dollar of capex has the potential to support more revenue and higher returns over time.

Given our strong business performance, we expect to continue to remain free cash flow positive in FY27. To complement cash generated by the business and preserve financial flexibility, we will access additional sources of funding when we believe it is attractive to do so.

In closing, we are off to a strong start to FY27 with accelerated growth across the Microsoft cloud. Product improvements along with efficiency gains across our data center infrastructure and our firstparty apps and agents are increasing the value and improving the outcomes we deliver to our customers.

Delivering that value to our customers positions us for durable long-term growth.

Can I ask um as incremental AI capacity comes online, what do you see as likely to be the more important driver of returns over the next few years? Improving utilization and unit costs within Azure or your ability to monetize more layers of each workload across fabric foundry and copilot.

Thanks for the question, Adam. Um I'd say all of the above. Um but I think the way we're coming at this is we have one pool and we want to get the pool to be as efficient um and funible right that's sort of the place where if I sort of think about uh all of the physics of how we're building out the data centers um all the operational rigor with which we can bring uh up the capacity And then of course how do we run the workloads that are optimized on our infrastructure and once you do that then it's just a function of how we allocate it uh by looking at the demand signal uh and even there u even in our new segment reporting I think you kind of see it which is uh co-pilot co-pilot stateful database underneath it is work IQ that gets used in foundry uh which is where people will build let's say a multi- aent system for supply chain that spans both unstructured and structured of course it uses a postcrist database uh in Azure and so and then by the way all the agentic work is registered in the agent 365 and um perception manages the security of it right so to us at least we look at all of this as the same infrastructure.

Of course, we report to you in a variety of different products, but your core question of where is the margin going to come from? Where's the leverage is going to come from? It's not going to come from any one.

It's going to come from every one of them. And it compounds when we work them across.

I'm wondering if you could unpack what I thought was uh one of the key metrics from this call and that is the guidance for Azure growth of 49 to 50% constant currency in December.

I can imagine there's a number of variables. the capacity you're putting out, the allocation to uh thirdparty customers, probably open AAI strength, but perhaps you could comment a little bit on what some of the key drivers are given how good that number seems at least to me. Thank you.

Uh thanks Carl for the question. Maybe um I'll start by talking a little bit about Q1 and I think that'll help to think through Q2 and and even going forward and it's not unrelated really to Adam's question at some level as well.

Uh in Q1 uh I would say the engineering teams have really delivered uh very very good work uh in terms of improving efficiency at the platform layer. That is not just a statement around the efficiency um of of GPUs.

It's a statement around the efficiency of every layer. How the app utilizes the platform and how Foundry utilizes the platform as well as the Azure platform itself. Um those efficiencies um you know they're sort of ground out every week and you have good ideas, a lot work, some don't and you stay at it.

So they're not maybe as predictable in terms of how much impact we'll get in quarter. Q1 they did a very good job and you saw some of that result in us being able uh to put more allocation into foundry in the quarter.

Um that's a great thing because we're as I said in the call we still have uh demand that exceeds supply. So where we can have our engineering teams deliver those efficiencies um we do really try to put it into foundry when we can uh because it's so important as Sati talked about into how customers broadly um are building what I would call against the new stack.

Secondly uh and you mentioned it uh token pricing will create a little bit of variability. We had higher token pricing than we expected in the quarter. Um listen, high quality models that we're able to take advantage of um and see good margins on do benefit us in the quarter.

Uh that did happen in Q1. Uh and I think also in that number in Q1 was the efficiencies I talked about uh applied not just to our GPU fleet but I think people sort of underestimated when the example Saka gave for Adam's question that's a GPU CPU storage memory workload.

I mean, it takes all of the pieces. And so, uh, our ability to also, uh, create additional capacity within our existing fleet, um, gave us some room to be able to convert that, uh, actually pretty quickly as well in Q1.

So, in Q2, uh, we've got those efficiency grains, which is great, and those will continue into Q2. um we need to find some more uh which we're counting on uh enable to get to that um guidance that I gave because I have faith in the team's work in Q1 uh continuing into Q2 but we also need that work uh to be able to help us a little bit because we had some supply we were counting on Q2 move out into H2 and so um you know I think and to your point there's also some unknown on um some token pricing through the quarter that stuff can change so you know I think feel good um in terms of the efficiency gains that we saw.

Um when we're able and when I'm able to see those and put them in, I feel good about guiding to that. Um but as other things are are are less predictable. I mean, I hope that's helpful on the on the levers.

we've made the investment into the frontier co company here coupled with changes in our sales motion which I talked a little bit about Um you know we need both of those things uh to make sure customers are because what I think Sak is saying we want them to utilize both the co-pilot license to its fullest and understand when the consumption meter is delivering value to them. uh the investment in the FDE organization or the frontier uh core core as well as new motions within our modern uh work in Microsoft 365 sales teams um are both meant to do that and I think to Saki's point it will it will be a slower move uh outside of coding but I also still think uh we're still seeing encouraging signs and uh and I I'm I'm feel positive about that.

Um and I think that that's why people are maybe rotating to Microsoft a little bit is because they're not willing to give up that uh free cash flow. They they're they're they've held to um putting out positive free cash flow.

And if they can also reiterate that through 2027, I think that'll be a really good sign for value investors that, you know, they're still going to make some money while bringing up operating cash flow and then whenever the capex slows down, free cash flow will skyrocket.

but at some point like Microsoft's not going to let themselves go back down into the low 300s, which is why I think they try to remain free cash flow positive.

and Microsoft I mean Microsoft showed us some great numbers today they they beat on Azure even though they had certain inventory pushed out for next quarter and the way they did that is by making efficiency on their GPU fleet the efficiency of token pricing and everything else and then they even guided for another strong quarter next next quarter on Azure with what 49 50% growth

very bullish in both um but both Microsoft and Google did miss get lower capex right uh Microsoft I think had the similar numbers

Now, if you are a long-term investor, it doesn't matter because uh um Microsoft just said that whatever they didn't spend this quarter, it's just going to go to the next to the second half of this year for them, right, of their fiscal year.

Uh Microsoft does not have to do that. I think that's why that's up.

Any more thoughts on Microsoft or nothing crazy there? Um surprised AI demand seems strong, free cash flow positive.

I think Azure is now 37% of of the revenues for Microsoft and RPO was I think flat quarter over a quarter. Yeah, I think they they also missed on RPO that maybe that got them a little upset but Microsoft it did pump to an all-time high.

I think once Amy Hood started talking a bit more about uh some of the headwinds next year in terms of margins and overall growth, that's where it went down a little bit along with the increase in capex.

But the other big thing she said was that cloud, I mean, they're expected to keep it at 50% for the next few quarters, which is just unbelievable, dude.

Um cloud's at 50. Topline's at 15 for Microsoft. like these cloud growth rates. Obviously, a ton of it's definitely open AAI and anthropic, you know, that's keeping it elevated, but there's also lots of

I'm not sure what specific metric, but they said it's 11%. So, I assume it was maybe either of backlog or of the cloud revenue. I would have to guess revenue. I think backlog is bigger but revenue for Q for the SEC for the entire quarter or for cloud itself.

Uh the way that I read the thing that he's saying is that it was 11% of their revenue. Jose, anything else from you on Microsoft here or at the end of the day conclusion is both companies had amazing quarters and if they get sold off, they get sold off.

and uh Microsoft is killing it as we see with the strong growth even if they missed on some of the uh capacity that they were trying to build up. Um so long-term investor nothing for me to really complain about.

And then you got Microsoft, which seems like the best quarter today. Stocks relatively flat to slightly up. But they didn't say anything I think that would freak the street out like Google said around capex and I guess that's why that's up 2%.