Microsoft Q2 Earnings Preview: 5 Things To Know

Microsoft Azure growth, Copilot adoption and customer appetite for first-party security products are expected topics on Wednesday’s quarterly earnings call.

Big growth numbers for the Microsoft Azure cloud business. Updated adoption numbers for Copilot artificial intelligence offers. And customer appetite for Microsoft security products.

These are some of the subjects likely to come up Wednesday when Microsoft Chairman and CEO Satya Nadella reports results for the second quarter of the Redmond, Wash.-based technology giant’s 2026 fiscal year. The quarter ended Dec. 31.

Microsoft could see total revenue grow 15 percent in the quarter to $80.3 billion, according to a KeyBanc report from this month. The investment firm’s estimate puts it just below Wall Street’s estimate of 15.3 percent.

Microsoft Q2 Earnings

The firm puts Microsoft 365 commercial cloud revenue at $21.4 billion, above Wall Street’s $21.3 billion. It expects the “intelligent cloud” segment to hit $32.5 billion compared with Wall Street’s $32.4 billion. And it expects operating income of $36.4 billion against Wall Street’s $36.6 billion.

Read on for topics expected to come up during Microsoft’s quarterly earnings report Wednesday.

Azure Growth

Microsoft executives will want to show high growth in the vendor’s Azure cloud business, with Wall Street watching for something close to and even beyond 40 percent growth year on year.

Strong responses in Morgan Stanley’s latest survey of channel partners, chief information officers and word of improved capacity for graphics processing units (GPUs) leads the investment firm to believe that Azure likely grew close to 40 percent in the second fiscal quarter, according to a January report.

Part of Morgan Stanley’s confidence in capacity improvements is increased shipments of Nvidia’s GB200 and 300 NVL72 racks in the most recent quarter. Total GB200 and 300 rack output is estimated to reach about 15,500, up from 8,300 in the previous quarter and 4,300 before that.

Azure should show about $1.9 billion added since the prior quarter, according to the investment firm. The Azure AI business should grow about 17 percent quarter on quarter, adding about $850 million.

Microsoft’s Azure AI business likely crossed $13 billion in the last few quarters and operated at a gross margin of about 45 percent, according to a Morgan Stanley report in December. The firm arrived at that estimate due to the core Azure business crossing the same scale back in the 2019 fiscal year with gross margins around 40 percent and 50 percent.

Gross margins for Microsoft’s Azure AI business excluding the OpenAI revenue share agreement could be about 20 percent already, according to a Morgan Stanley report in December. The firm expects these margins to hit 30 percent by the 2029 fiscal year and even exceed 40 percent in the coming years.

Microsoft and its solution providers benefit from a trend of CIOs expecting software spending growth to accelerate 9 basis points from 3.7 percent growth year on year in 2025 to 3.8 percent growth in 2026, according to Morgan Stanley. More than half of application workloads reside in Microsoft Azure today with public cloud looking like it will continue to accelerate in the years ahead.

Customers are also accelerating migrations from the on-premises Windows Server operating system and SQL Server to the cloud, according to Morgan Stanley. And Azure AI’s diversity of models, trust, security, enterprise-grade scaffolding and the productivity applications with the Microsoft 365 suite help differentiate this business against the competition.

About 30 percent of VARs surveyed by KeyBanc said they expect 30 percent faster growth in customer cloud spend, according to a January report by the investment bank. That marks the highest levels seen in the survey since the third quarter of 2023.

The firm does expect decelerating Azure growth to the low 30s during 2026, with KeyBanc assuming that Microsoft will keep hitting capacity constraints against high demand, according to the report.

Azure and Copilot could add another $25 billion to Microsoft’s topline trajectory over the next 12 months to 18 months, according to a Wedbush report Monday.

Copilot Inflection Point

Microsoft’s Nadella will likely be prepared with a host of updated user and usage stats across the Microsoft portfolio, and some analysts are looking for a potential inflection point in the story for Microsoft’s Copilot AI chatbot offering.

Almost all the CIOs who participated in a recent survey with Morgan Stanley said they plan to use Microsoft AI products over the next three years, with CIOs saying they expect to deploy Microsoft 365 Copilot across 36 percent of their organizations over the next 12 months. The number grew from 31 percent in the second quarter of 2025 and 17 percent in the fourth quarter of 2024.

The number increases to 61 percent of the organization over the next three years, the largest sequential increase in the past three readings, according to Morgan Stanley.

Among CIOs who already leverage Microsoft, 80 percent plan to use M365 Copilot in the next 12 months, Morgan Stanley found. That’s up from 72 percent in the second quarter of 2025 and marks the fifth consecutive sequential increase of CIOs leveraging Microsoft's M365 Copilot AI capabilities.

Microsoft solution providers told Morgan Stanley that Copilot awareness is still ahead of actual penetration in customer businesses, according to a January report by the investment firm. But the partners are optimistic on long-term Copilot momentum given healthy upgrading activity to the more expensive E5 licenses, security advantages with Microsoft tools and recent product innovations.

The partners who spoke with Morgan Stanley said they saw limited incremental Copilot adoption quarter on quarter. But they see a higher correlation of Copilot adoption with E5 license holders compared with less expensive E3 license holders.

Looking at a separate survey, industry partners and customers told KeyBanc that they still find Copilot too expensive, with many organizations having trouble adding $30 per-user, per-month to their Microsoft bills, the investment firm said in a January report. Still, that license can still prove a savings over time, with the firm noting that cobbling together assorted products by OpenAI, Canva, Perplexity and Claude could result in a bill of around $200.

Updates In Security, Purview, Defender

Recent surveys on CIOs and the channel show some strong signals for Microsoft’s first-party security offers.

Microsoft solution providers see Purview, Defender for Endpoint and other first-party security tools as key to license upgrades to the more expensive E5 offer, according to a Morgan Stanley report earlier this month.

Resellers said Purview in particular saw incremental market-share gains in the latest quarter in the data security market against Varonis and other cybersecurity competitors, according to the report. Partners also see Purview usage linked to improving Copilot adoption because Purview provides the data security, posture management, compliance and governance controls to make sure Copilot uses data appropriately.

Morgan Stanley’s CIO survey has Microsoft as the second largest share gainer in endpoint security behind CrowdStrike and taking the leading position in identity and access management (IAM) from Okta, according to a January report.

The firm found that 27 percent of CIOs expect to adopt Microsoft’s Security Copilot AI tool in the next three years, in line with near-term expectations at 27 percent over the next 12 months as well, according to the report. Security Copilot works with Defender, Entra, Intune and Purview for deploying AI agents for threat detection, investigation and response. Morgan Stanley also voiced potential for Microsoft to take on Splunk in security information and event management (SIEM).

In a separate survey, VARs pointed to better-than-expected performance in the quarter from security, according to a KeyBanc report earlier this month.

End users are looking to Microsoft as a single vendor for security tools because of the need for a unified architecture for expanding regulatory, compliance and data governance requirements, William Blair said in a report Monday.

Customer Responses To Price Changes

Analysts on Wednesday’s call could seek color on how Microsoft customers are handling the loss of volume discounts in November and the upcoming price increases set for July.

The Microsoft 365 new contract price increases, which start July 1, also see Copilot Chat enhancements, Agent Mode and other new embedded features added to the suite.

In December, Morgan Stanley estimated that the price increase should result in another $2 billion in revenue in fiscal year 2027, $4 billion in 2028 and $6 billion in 2029, according to a report. Microsoft 365 Commercial Cloud should grow about 2 percent in fiscal year 2027.

The price increases to M365 by up to 33 percent plus the removed volume discounts—effectively a double price increase—have led to some customer angst and pricing fatigue, according to a KeyBanc report this month. Some customers have sought early renewals to get ahead of price changes.

Around one-fifth of Microsoft customers hit by the price changes could be looking for alternatives like Google, but KeyBanc considered it a trend to watch for now, not something having a material impact on Microsoft and its partners at the moment.

PC Refresh Cycle

Wednesday’s call could yield some updated figures around the PC refresh cycle with Microsoft ending Windows 10 support last year and continued enterprise interest in AI PCs.

The migration to Windows 11 has driven consumer PC sales, according to a Morgan Stanley report from December. Chips built into newer AI PCs that run small models on the device have potential.

The higher average selling price of these devices could be a boon for solution providers—or it could keep some customers away. Microsoft’s extended security updates (ESUs) to allow some level of protection for Win10 ends on Oct. 13, which could mean another wave of Windows 11 upgrades is on the horizon for device solution providers.

ESUs resulted in an immaterial refresh cycle in 2025, according to a Morgan Stanley report from earlier this month. X-ray machines using Windows and other applications also didn’t get upgrades to avoid a software redesign.

PC makers are also starting to “de-spec” entry-level devices to maintain profits amid rising memory storage costs and lowered memory storage supply, according to the firm. Many 512-GB storage options are being replaced by 256-GB ones, for example. This could potentially push users to higher-end models for the specifications they are used to.

The enterprise buying cycle focus on future-proofing could push companies to buy AI-capable PCs now, plus AI PCs have proven better than traditional PCs for avoiding cloud reliance for common AI workloads, improving latency, privacy, security, personalization and cost, according to a Bank of America report earlier this month.

Copilot+ PCs could win over users with the promise of better efficiency per watt with their NPUs compared with CPUs and GPUs, resulting in potentially better battery life.

On the subject of hardware, server price increases between 15 percent and 40 percent could accelerate customer cloud migration timelines, another positive for Microsoft and its ecosystem, according to a William Blair report Monday.