Microsoft (MSFT) earnings preview: what to watch in Q1 2027

Microsoft reports results for its fiscal first quarter of 2027, the three months from July to September 2026, on Wednesday, October 28, 2026. The date comes from Microsoft's own investor-relations page. This is the first quarter of a year in which, by Microsoft's own 10-K, a large wave of data-center costs starts to reach the income statement.

What last year showed

Our analysis of Microsoft's fiscal 2026 results (the year to June 30, 2026) found demand was not the problem:

• Revenue rose 17.8% to $331.8 billion. Azure, Microsoft's cloud computing rental business, grew 41% and passed $100 billion of annual revenue.
• Operating margin, the share of revenue left after all running costs and before interest and tax, rose to 46.8% from 45.6%.
• Reported diluted earnings per share (EPS) rose 31.6% to $17.95, but Microsoft's own adjusted EPS, which strips out OpenAI gains and losses, rose 22.3% to $17.28.
• Capital spending rose 80% to $115.9 billion, so free cash flow (operating cash flow minus capital spending) fell 6.5% to $67.0 billion.

The fourth quarter (April to June) set the starting point for this report: revenue of $90.0 billion (+18%), Azure growth of 43%, gross margin down to 67.2% from 68.6% a year earlier, capital spending of $35.8 billion, and free cash flow of $19.6 billion, down 23%.

What management said about the year ahead

The 10-K gives no numeric guidance; Microsoft gives that on its earnings call, which our report did not cover. The filing's own statement of direction was: "The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins." It also listed $329.1 billion of data-center and other leases signed but not yet started, beginning between fiscal 2027 and 2033.

Three things to watch

1. Cloud gross margin against 66%. Gross margin is the share of revenue left after the direct cost of delivering a product, such as running data centers. Microsoft Cloud gross margin slipped from 68% to 67% to 66% during fiscal 2026, and total company gross margin fell 1.4 points year on year in the fourth quarter. If the leases above start showing up in Intelligent Cloud's cost of revenue, the cloud margin moves below 66%. A figure that holds at 66% while Azure stays near its 43% fourth-quarter growth rate would mean revenue is keeping pace with the build-out.

2. Capital spending and the cash left over. Quarterly capital spending more than doubled to $35.8 billion in the fourth quarter. Free cash flow fell year on year in that quarter and for the full year, the second annual decline in a row. If spending rises again from $35.8 billion, watch whether operating cash flow grows enough to keep free cash flow from falling a third time. Our report also noted that lower cash tax payments helped operating cash flow in fiscal 2026, so that support may not repeat.

3. The gap between reported and adjusted EPS. OpenAI-related gains added $5.0 billion to fiscal 2026 net income, and the adjusted figure still included a $3.2 billion fourth-quarter gain on Microsoft's Anthropic stake. Investment results like these sit in "other income" and can swing either way. Compare reported EPS with adjusted EPS, and check other income for another Anthropic mark, before reading the headline EPS growth as business growth.

A smaller item: our report found the Windows inventory build only partly reversed (Windows OEM and Devices fell 7% in the fourth quarter, with inventory "elevated" per the 10-K), so the More Personal Computing segment, which shrank 1% last year, may still be weak.

We will publish our analysis of the quarter after Microsoft files it. Until then, the fiscal 2026 report has the full figures behind this note.