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By Brian Nelson, CFA
On January 28, Microsoft (MSFT) reported strong second quarter fiscal 2026 results (ended December 31, 2025) with both revenue and non-GAAP earnings per share exceeding the consensus forecast. Revenue of $81.3 billion beat consensus of $80.3 billion and increased 17% year-over-year (up 15% in constant currency), while operating income of $38.3 billion increased 21% year-over-year (up 19% in constant currency). Non-GAAP net income was $30.9 billion in the quarter, increasing 23% year-over-year (up 21% in constant currency). Non-GAAP diluted earnings per share came in at $4.14, increasing 24% (up 21% in constant currency) and exceeding the consensus forecast of $3.92.
Management had the following to say about the results:
We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises. We are pushing the frontier across our entire AI stack to drive new value for our customers and partners.
Microsoft Cloud revenue crossed $50 billion this quarter, reflecting the strong demand for our portfolio of services. We exceeded expectations across revenue, operating income, and earnings per share.
Our customer demand continues to exceed our supply. Therefore, we must balance the need to have our incoming supply better meet growing Azure demand with expanding first-party AI usage across services like M365 Copilot and GitHub Copilot, increasing allocations to R&D teams to accelerate product innovation and continued replacement of end-of-life server and networking equipment.
Commercial remaining performance obligation, which continues to be reported net of reserves increased to $625 billion and was up 110% year-over-year with a weighted average duration of approximately 2.5 years. Roughly 25% will be recognized in revenue in the next 12 months, up 39% year-over-year. The remaining portion recognized beyond the next 12 months increased 156%. Approximately 45% of our commercial RPO balance is from OpenAI. The significant remaining balance grew 28% and reflects ongoing broad customer demand across the portfolio.
Azure and other cloud services revenue increased 39% (up 38% in constant currency), showcasing continued strength in this area, but a growth rate a little light of what the Street was looking for. The company returned $12.7 billion to shareholders in the form of dividends and share repurchases in the second quarter of fiscal year 2026. Microsoft ended the quarter with $89.5 billion in cash and short-term investments and short- and long-term debt of $40.3 billion. For the three months ended December 31, 2025, net cash from operations totaled $35.8 billion, while capital spending was $29.9 billion, up 89% year-over-year, resulting in free cash flow generation of $5.9 billion.
Though Azure and other cloud services revenue disappointed some investors in the quarter, the pace of growth was still robust. Capital spending is elevated, and there are questions as to whether Microsoft is maximizing return on such investments, but operating cash flow continues to be strong. Shares are under pressure following the release of its second quarter fiscal 2026 results, but we continue to like Microsoft as a holding in the newsletter portfolios.
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Brian Nelson owns shares in SPY, SCHG, QQQ, QQQM, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, QQQM, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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