Microsoft Stock: Azure’s revenue is finally public. Its margin isn’t

For the first time, Microsoft has put a dollar figure on Azure, its cloud computing business: $101.9 billion in revenue for the fiscal year that ended in June 2026. That makes Azure bigger than Microsoft 365, the subscription business built on Office.

The same filing retires the reporting segment that gave investors their closest view of what Azure costs to run.

Microsoft is replacing its three segments with two, starting with the quarter ending September 30. Investors gain a clean Azure revenue line. They lose the old Intelligent Cloud segment, which was roughly three-quarters Azure and carried its own cost and profit figures. Over the last eight quarters, that segment’s gross margin fell from 64.2% to 57.1%. In the new structure, Azure’s costs sit alongside Microsoft 365’s much fatter margins, and the combined operating margin barely moved last year.

That trade-off is the most useful thing to understand about Microsoft stock right now.

Article Brief

Key Takeaways

5 Points30s Read

1. 01A first–Microsoft disclosed Azure revenue in dollars for the first time: $101.9 billion in fiscal 2026, up 40%, ahead of Microsoft 365 cloud at $100.3 billion.
2. 02The trade-off–The same change retires the Intelligent Cloud segment, whose gross margin fell from 64.2% to 57.1% over eight quarters as AI infrastructure costs rose.
3. 03The blend–The new Agents and Infra segment combines Azure with high-margin Microsoft 365, and its operating margin was essentially flat at 50.9% for the year.
4. 04The spending–Cash capital spending rose 80% to $115.9 billion, depreciation rose 56%, and $329.1 billion of data-center leases have been signed but not yet started.
5. 05The stock–Shares rose 15.5% the day after July results and are up 32.9% this quarter; the September 2 segment change moved them less than 1%.

What Microsoft disclosed

The change came in a presentation filed on September 2. From fiscal 2027, Microsoft will report two segments: Agents and Infra, which holds Azure, Microsoft 365, GitHub, Dynamics, LinkedIn’s business services and server licensing; and Devices and Consumer, which holds Windows, Xbox and advertising.

Chief executive Satya Nadella framed it as more openness. Within each segment, he wrote, investors “will have full transparency of quarterly revenue across each of our key businesses, including Azure.” Microsoft had previously disclosed only Azure’s growth rate, never its size, and CNBC noted that it still will not report Azure’s costs, margins or capital spending separately.

The restated history is where the story is. Azure revenue grew 40% to $101.9 billion in fiscal 2026, from $72.6 billion. Microsoft 365 cloud, which now includes GitHub and Security Copilot, grew 18.5% to $100.3 billion. Azure overtook it in the January-to-March quarter, $26.0 billion to $25.4 billion, and widened the gap to $29.4 billion against $26.7 billion by June. In the June quarter, Azure was 32.7% of Microsoft’s entire revenue.

What the retired segment was showing

The old Intelligent Cloud segment held Azure, on-premises server products such as Windows Server and SQL Server, and enterprise services. Because Azure grew so much faster than the rest, its share of the segment rose from about two-thirds to about three-quarters over the last two years, on Microsoft’s restated Azure figures. By June 2026, Intelligent Cloud was mostly Azure.

Its cost line tells the AI story more directly than anything Microsoft will publish from here. In fiscal 2026, the segment’s revenue rose 30%. Its cost of revenue rose 44%. Gross margin fell from 62.2% to 58.0% for the year, and by quarter it slid from 64.2% at the start of fiscal 2025 to a low of 56.4% in the March 2026 quarter, finishing the year at 57.1%.

Some of that decline is mix rather than Azure alone. On-premises server licensing is very profitable and has been shrinking as customers move to the cloud, which drags the segment’s margin down on its own. But the direction matches what Microsoft itself says. In its annual report, the company attributes the fall in its Microsoft Cloud gross margin, to 66%, to “continued investments in AI infrastructure and growing AI product usage.”

What the new segment shows instead

Agents and Infra combines the cloud infrastructure with Microsoft 365 and the rest of the old Productivity and Business Processes segment, whose gross margin held between 81% and 83% throughout. Blend the two and the picture softens considerably.

On the restated numbers, Agents and Infra earned an operating margin of 50.9% in fiscal 2026, against 50.7% the year before — essentially unchanged. Its gross margin did decline, from 73.0% to 68.5% across the eight quarters, but far less sharply than the cloud business inside it.

To be fair to Microsoft, this is not concealment. The company will keep publishing its Microsoft Cloud gross margin percentage as an investor metric, and the new segments arguably match how it now sells: Copilot, GitHub and Azure are increasingly bought together. But the practical effect is that the clearest public view of what AI infrastructure is doing to cloud profitability ends with the old structure. From the first-quarter report due in late October, investors will see Azure’s revenue in dollars and its profitability only inside a blend.

Why the costs are rising

The spending behind that margin compression is visible in the balance sheet.

Microsoft spent $115.9 billion in cash on property and equipment in fiscal 2026, up 80%, and took on a further $24.6 billion of assets through finance leases. The value of its servers, network equipment and software rose to $215.9 billion at cost from $132.8 billion a year earlier. Depreciation, which flows directly into cost of revenue, rose 56% to $34.3 billion. At year end, $26.7 billion of equipment purchases were still sitting unpaid in accounts payable.

The commitments ahead are larger. The annual report discloses $329.1 billion of leases, primarily for data centers, that Microsoft has signed but that have not yet started, commencing between fiscal 2027 and 2033 with terms of up to 20 years. Bloomberg reported on September 10 that Microsoft plans to more than triple its data-center capacity to more than 38 gigawatts by 2032, from about 12 gigawatts now, after demand grew strong enough that it had to turn some business away.

The 38-gigawatt figure also understates how much computing Microsoft is lining up, because it covers only facilities Microsoft owns or leases directly. It excludes capacity rented from specialist providers, which Microsoft buys as well; TECHi reported in July that the company is now buying compute from Mistral in Europe rather than only selling it.

Guidance for the September quarter calls for capital spending of more than $50 billion, a figure Microsoft says includes “the impact of the useful life update.” That phrase matters, because how many years servers are depreciated over directly changes reported margins. Neither the annual report nor the presentation quantifies it.

What the market bought

Microsoft’s stock is up 32.9% since the end of June, fifth-best among the 41 companies in TECHi’s ranking of AI stocks this quarter. Most of that came in one session. On July 30, the day after fiscal fourth-quarter results, the shares rose 15.5%, from $390.54 to $451.10.

The results gave investors three things they wanted. Nadella said Azure had passed $100 billion in annual revenue for the first time and that Microsoft 365 Copilot had reached more than 30 million paid seats. And commercial remaining performance obligation — contracted revenue not yet recognised — rose 84% to $678 billion. That was a sharp reversal after a first half in which the stock fell 21% amid fears that AI agents would erode Microsoft’s per-seat software business, the argument TECHi examined in May when it described agent metering as the new margin story.

The backlog figure deserves a moment on its own. Commercial remaining performance obligation of $678 billion is revenue customers have contracted but Microsoft has not yet delivered, and it is now slightly larger than the $664 billion backlog at Oracle that has drawn so much scrutiny. Microsoft’s is spread across a far broader customer base and a business with $331.8 billion of annual revenue, which makes it a different kind of number. It is also the demand the $329.1 billion of leases is being built to serve.

The September 2 segment change barely registered. The shares fell 0.8% that day and rose 2.7% the next.

That reaction suggests the market is paying for Azure’s growth and Copilot’s adoption and is not, for now, pricing the margin cost of delivering them. The earnings also carry investment gains. Fiscal-year net income of $133.7 billion included $6.5 billion of pre-tax net gains from Microsoft’s OpenAI investment, which the company excludes from its adjusted figures, and that the fourth quarter included a $3.2 billion gain on its Anthropic investment, which it does not.

The other segment is moving the opposite way. Devices and Consumer, which holds Windows, Xbox and search advertising, grew revenue just 1.2% in fiscal 2026, and its operating income in the June quarter fell to $3.9 billion from $4.1 billion a year earlier. Microsoft’s guidance for the September quarter calls for Windows OEM and devices revenue to decline in the low twenties and Xbox content and services to decline in the mid-single digits. Almost all of the company’s growth, and almost all of its capital spending, now sits in one segment.

What would change the read

The cloud gross margin line. Microsoft has guided to a Microsoft Cloud gross margin that is “relatively stable quarter-over-quarter.” With Azure growth guided at 44% to 45% in constant currency for the September quarter — which would put quarterly Azure revenue a little above $32 billion — holding that margin while spending more than $50 billion in a quarter would be a genuine achievement.

Whether Azure’s profitability ever gets its own line. Microsoft now reports Azure revenue to the dollar. Adding its cost of revenue, even annually, would let investors test the argument that scale is improving cloud economics rather than just the blended view.

The pace of new capacity against demand. The $329.1 billion of leases waiting to start and the 38-gigawatt target are bets that demand stays ahead of supply for years. If it does, depreciation gets absorbed by revenue. If it does not, the costs arrive on schedule and the revenue does not.

Microsoft has given investors the number they asked for. The next question is what it costs to earn it, and the new segments make that slightly harder to see.