--- title: "MSFT: Tides Turn — Old Guard Back in Favor?" type: "Topics" locale: "en" url: "https://longbridge.com/en/topics/43074651.md" description: "$Microsoft(MSFT.US) reported Q4 FY2026 results for the period ended Jun after the U.S. market close on Jul 30. In short, the AI tide has swung back in its favor, and Microsoft can finally breathe easier.1) As the key monetization driver for its AI investment, Azure re-accelerated to +43% YoY this quarter (ex-FX the same), vs. more bullish previews at 40–42%. This topped expectations.More importantly, cc growth guidance for next quarter is 45%, implying further acceleration at Azure. Codex has been catching up fast lately..." datetime: "2026-07-30T11:17:32.000Z" locales: - [en](https://longbridge.com/en/topics/43074651.md) - [zh-CN](https://longbridge.com/zh-CN/topics/43074651.md) - [zh-HK](https://longbridge.com/zh-HK/topics/43074651.md) author: "[Dolphin Research](https://longbridge.com/en/news/dolphin.md)" --- # MSFT: Tides Turn — Old Guard Back in Favor? $Microsoft(MSFT.US) after the US close on Jul 30 reported FY26 Q4 results for the period ended Jun. In short, the AI cycle finally swung back in Microsoft's favor, offering a clear sigh of relief. **1) Azure, the key payback engine for AI spend, re-accelerated to +43% YoY this quarter (same ex-FX)**, topping even optimistic calls for 40–42%. More importantly, management guided to +45% YoY ex-FX for next quarter, implying further acceleration ahead. After Codex's recent catch-up, OAI's Jul ARR has already exceeded the entire Q2. That is a clear positive for Microsoft's cloud consumption. **2) Capex (incl. capital leases) was $41bn; next quarter is guided to $50bn, as expected.** The move from ~$190bn to ~$175bn Capex for CY26 is largely an accounting choice, not a change in underlying intent. Some in the market expected Microsoft to hike Capex, but we did not, mainly because MSFT invested early, while Google is playing catch-up with higher spend. **3) A rare cloud giant with resilient cash flow.** Operating cash inflow was ~$55bn for the quarter. Of the $41bn Capex, $5.6bn was capital leases, so cash Capex was under $36bn, leaving nearly $20bn of FCF for the quarter. **4) Profit surprisingly steady.** Despite fears that AI Capex entering depreciation would crush GPM, and despite ongoing cost actions this year to prioritize AI, operating margin did not fall and even ticked up. OP reached $40.6bn, +18% YoY, slightly outpacing revenue growth of +17.7%. **5) Solid bookings.** New bookings were $77.4bn; even without OAI as a single mega-customer, bookings have begun to recover. Recognized B2B cloud revenue was only $59.3bn in the quarter, so bookings outpacing recognized revenue naturally lifts RPO, which rose by $50bn to $678bn. **Dolphin Research View** In 2023, Microsoft was the primary beneficiary behind OpenAI's surge, via OAI cloud usage and the AI-ification of Microsoft's productivity suite. MSFT was in the spotlight. Then MSFT and OAI drifted apart, Azure growth slowed, and AI features in Office saw slower-than-hoped monetization. With weaker in-house models and chips post-split, the market turned cautious and compressed MSFT's multiple. Post this print, model and chip self-development have not visibly improved, but Azure is re-accelerating and bookings are rebounding. This suggests that in the post-OAI phase, customer diversification is starting to work. On the P&L: **disciplined AI spend (no Capex hike), strong AI-driven growth (Azure beat with acceleration, bookings recovering), stable margins, and resilient cash flows make MSFT look compelling, especially with a relative valuation discount vs. peers.** Ahead, OAI's GPT-5.6 launch in Jul should drive cloud usage, GitHub Copilot pricing moved from monthly to usage-based in Jun, and an RPO near $680bn suggest MSFT may be exiting the post-‘split’ lull with OAI. On valuation, after the after-hours move, MSFT at ~$3.1tn implies roughly ~20x PE on FY27 post-tax operating profit. At the peak of Alphabet's AI full-stack narrative, the market granted a 25–28x multiple; given MSFT has yet to fully close the hardware/model gap, a ~22–23x multiple implies ~15% upside potential. **Detailed takeaways from the print:** **I. Changes to reporting segments** From FY25, MSFT made notable changes to segment disclosure. The key shift is moving all enterprise-facing 365 services — Commercial Office 365, Windows 365 and Security 365 — into the Productivity & Business Processes (PBP) segment. For specifics and our prior view, see the 1Q25 review; the chart below summarizes the changes. **II. Bookings are back** In cloud, bookings and RPO matter as much as revenue recognition. New bookings had turned negative YoY earlier, spooking the market, but recovered this quarter. By our estimate, quarterly bookings exceeded the total of MSFT's cloud (SaaS + PaaS). That pace naturally pushes RPO higher. **II. Depreciation has not spiked; cash flow remains solid** Capex was $41bn, but a portion was via capital leases, so cash Capex was ~$36.5bn. Despite being an early mover in AI Capex, depreciation and amortization barely rose YoY this quarter, helping limit GPM pressure. Since three quarters ago, the mix of shorter-cycle assets (servers, etc.) in Capex has climbed from ~50% to above two-thirds. We therefore think the depreciation headwind is not yet arriving in force. What sets MSFT apart is that even with much higher Capex, the company is a cash machine, generating $40–50bn of operating cash per quarter. Cash Capex of $30–40bn is not enough to overwhelm OCf. FCF fell 23% YoY to $19.6bn, but remains robust. Given guidance, assuming ~18% OCf growth next year and ~$210bn of Capex, we think FY27 full-year FCF should be roughly maintained. **III. Segment performance: Cloud drives growth; productivity underpins; personal computing lags** **1.1 Cloud: Azure is re-accelerating, profitability intact.** Azure revenue grew 43% YoY this quarter (+43% ex-FX), ahead of optimistic ~42% views, with next-quarter guide at 45% ex-FX, confirming acceleration. Based on management's comment that 2H will grow faster than 1H, rising RPO and servers coming online, we think Azure has exited the post-OAI lull and re-entered acceleration. **1.2 Productivity: rock solid** The second most important driver, **Microsoft 365 Commercial Cloud**, saw revenue growth ease slightly to 14% this quarter. The go-to-market continues to upsell from E3 to E5 to E7, effectively lifting blended ASP via higher-value bundles. E7 adds M Copilot (priced at $30 standalone) and Agent features on top of core Office, plus enhanced security. Standalone pricing would be near $120, while the E7 bundle is $99 per month. There is no 'SaaS apocalypse', but customers are adopting AI add-ons more slowly than hoped. Ex-FX, the **Productivity & Processes** segment, which houses B2B Microsoft 365, ticked back to +14% from +13% last quarter, staying steady. **1.3 Personal: the laggard** Personal segment revenue fell 5% YoY, modestly better than the -10% street view. With PC demand pressured by higher component costs, the market expected Windows to drop \>15%, but it fell 7%. Gaming contracted the most. Bing and other ad lines tied to Windows rose just 7% YoY (+10% ex-FX), showing AI has not displaced Google as the clear leader in search. Group revenue was $90.0bn, +17.7% YoY, slightly ahead of the ~15% consensus. Ex-FX, underlying growth was ~17%, with each segment coming in a bit better than expected. **IV. Cloud GPM faces structural pressure; stable OPM relies on operating leverage** 1) The mix shift is clear: cloud is the largest and fastest-growing business, and rising AI mix compresses cloud GPM. That is why most models assume sequential GPM pressure; this quarter cloud GPM surprised to the upside, lifting overall GPM. 2) OP was $40.6bn, +18% YoY, broadly in line with revenue growth. With structural GPM pressure, profit growth was driven by operating leverage. Faster top-line growth diluted R&D and S&M growth. Headcount fell by 5k this fiscal year to 123k, a clear shift from headcount to AI investment. By segment, More Personal Computing's profit contribution is negligible. MSFT's earnings power is primarily Productivity SaaS plus Cloud. Cloud is the revenue engine, but Office still delivers superior profitability. ASP lift via Copilot bundling puts some pressure on Office margins, including this quarter. The **Intelligent Cloud OPM** was 40.4%, flat YoY and better than feared. That was a notable positive surprise given Capex and depreciation concentration in this segment. **Prior Dolphin Research coverage on MSFT:** **Earnings reviews** Oct 30, 2025 Trans: [**Microsoft (Trans): Not a concierge for a single mega-customer**](https://longbridge.com/en/topics/35770601) Oct 30, 2025 Review: [**After drifting from OpenAI, is MSFT still attractive?**](https://longportapp.cn/topics/35766917) Jul 31, 2025 Trans: [**MSFT (Trans): $30bn Capex in Q1, front-loaded for the year**](https://longportapp.cn/en/topics/32429505) Jul 31, 2025 Review: [**Azure's limitless growth? MSFT as the AI bellwether**](https://longportapp.cn/en/topics/32419616) May 1, 2025 Trans: [**MSFT (Trans): Capex guide intact; Q4 supply bottlenecks remain**](https://longportapp.cn/en/topics/29279682) May 1, 2025 Review: [**Azure resurges; MSFT back as AI mainstay**](https://longportapp.cn/en/topics/29277632) Jan 30, 2025 Trans: [**Microsoft: Balancing current spend vs. future payoff is the key AI question**](https://longportapp.cn/en/topics/26882791) Jan 30, 2025 Review: [**Microsoft: The gap between sober reality and grand vision**](https://longportapp.cn/en/topics/26882749) Risk disclosure and disclaimer: [Dolphin Research Disclaimer and General Disclosure](https://support.longbridge.global/topics/misc/dolphin-disclaimer) ### Related Stocks - [GOOGL.US](https://longbridge.com/en/quote/GOOGL.US.md) - [MSFT.US](https://longbridge.com/en/quote/MSFT.US.md) - [GOOG.US](https://longbridge.com/en/quote/GOOG.US.md) - [GOOGN.US](https://longbridge.com/en/quote/GOOGN.US.md) ## Comments (1) - **JimmyGreen · 2026-07-30T13:50:07.000Z**: This title really made me unable to resist clicking in to see 😂