Microsoft Corporation reported search and news advertising revenue excluding traffic acquisition costs reached $3.8 billion for the second quarter of fiscal year 2026, representing growth of 10% compared to the same period last year, according to financial documents released on January 28, 2026. The Redmond-based technology company disclosed these results during its quarterly earnings announcement, marking the slowest quarterly growth rate for the search advertising segment since fiscal year 2024, even as the overall business demonstrated strong momentum across cloud and artificial intelligence services.

The search advertising growth deceleration occurred against a backdrop of extraordinary overall performance. Total revenue reached $81.3 billion and increased 17%, while Microsoft Cloud revenue surpassed $50 billion for the first time, increasing 26% year-over-year. According to Satya Nadella, chairman and chief executive officer, during the earnings call on January 28, "This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year-over-year, reflecting the strength of our platform and accelerating demand."

The search advertising segment delivered $3.812 billion in revenue excluding traffic acquisition costs for the quarter ended December 31, 2025, compared to $3.558 billion in the corresponding period of fiscal year 2025, according to the company's investor metrics. Growth measured in constant currency reached 9%, reflecting foreign exchange headwinds that impacted performance across Microsoft's business segments. The deceleration from 21% growth rates maintained throughout fiscal year 2025 represents a significant moderation in the advertising business trajectory.

Amy Hood, executive vice president and chief financial officer, addressed the performance during the earnings call. "Microsoft Cloud revenue crossed $50 billion this quarter, reflecting the strong demand for our portfolio of services," Hood stated. "We exceeded expectations across revenue, operating income, and earnings per share." The company did not provide specific commentary during the earnings call about the search advertising slowdown, focusing instead on cloud infrastructure expansion and artificial intelligence capabilities.

More Personal Computing segment dynamics

The More Personal Computing segment, which houses the search and advertising business, generated $14.3 billion in revenue for the quarter, representing a 3% decrease compared to the prior year period. Operating income for this segment reached $3.8 billion, down from $3.9 billion in the second quarter of fiscal year 2025, according to segment results disclosed in the financial statements. The segment faced headwinds from Xbox content and services revenue, which declined 5% on a GAAP basis and 6% in constant currency.

Windows OEM and Devices revenue increased 1% on a GAAP basis while remaining relatively unchanged in constant currency. The minimal growth reflects ongoing challenges in the personal computer market, though Microsoft has maintained stable licensing revenue through enterprise agreements and device partnerships. According to the metrics data, Windows OEM and Devices growth has remained in the low single digits throughout fiscal year 2025 and into fiscal year 2026, ranging from 1% to 6% across recent quarters.

The segment's performance contrasted sharply with Microsoft's other business divisions. The Productivity and Business Processes segment generated $34.1 billion in revenue and increased 16%, while the Intelligent Cloud segment produced $32.9 billion in revenue and increased 29%. The divergence underscores the varying growth trajectories across Microsoft's portfolio, with cloud and productivity services demonstrating substantially stronger momentum than consumer-focused offerings in the More Personal Computing division.

Gaming revenue weakness contributed to the segment's overall decline. Xbox content and services revenue decreased 5% to approximately $3.0 billion for the quarter, based on calculations derived from historical revenue patterns. Microsoft has integrated gaming advertising inventory through its casual games portfolio, including titles from King such as Candy Crush, though the company does not separately disclose gaming advertising revenue in its financial statements.

Artificial intelligence infrastructure investments accelerate

Microsoft disclosed capital expenditures of $37.5 billion for the second quarter of fiscal year 2026, representing a substantial increase from $22.6 billion in the first quarter and $22.6 billion in the corresponding period of fiscal year 2025, according to the capital expenditures statement. The dramatic escalation in infrastructure spending reflects Microsoft's aggressive buildout of artificial intelligence capacity to support growing demand for cloud services and AI-powered applications across its customer base.

Nadella detailed the infrastructure expansion during the earnings call. "All up, we added nearly one gigawatt of total capacity this quarter alone," he stated, describing the scale of datacenter deployment. The company announced datacenter investments in seven countries during the quarter to support local data residency requirements and sovereignty considerations increasingly prioritized by enterprise customers navigating regulatory frameworks across different jurisdictions.

The infrastructure expansion includes significant advances in Microsoft's custom silicon capabilities. "Earlier this week, we brought online our Maia 200 accelerator," Nadella explained during the call. "Maia 200 delivers 10+ petaFLOPS at FP4 precision with over 30% improved TCO, compared to the latest generation hardware in our fleet." The deployment strategy includes scaling the new chip for inferencing and synthetic data generation for the company's superintelligence team, as well as powering Copilot services and Foundry platform offerings.

Microsoft connected its Fairwater datacenter sites in Atlanta and Wisconsin through an AI WAN to create what the company describes as a first-of-its-kind AI superfactory. According to Nadella, "Fairwater's two-story design and liquid cooling allow us to run higher GPU densities and thereby improve both performance and latencies for high-scale training." The technical architecture demonstrates Microsoft's focus on optimizing tokens per watt per dollar, a metric the company identified as critical for long-term competitiveness in cloud infrastructure.

The substantial infrastructure investments contributed to increased operating expenses. The More Personal Computing segment's operating expenses reached $4.1 billion, up from $3.9 billion in the prior year period, while operating expenses across all segments totaled $17.0 billion compared to $16.2 billion one year earlier. The increased spending supports Microsoft's strategic positioning as AI workloads become increasingly computationally intensive and distributed across geographic regions.

Cloud services demonstrate sustained momentum

Microsoft Cloud revenue reached $51.5 billion for the quarter and increased 26% on a GAAP basis and 24% in constant currency, according to the investor metrics disclosure. The milestone represents the first time the company's combined cloud services have exceeded $50 billion in a single quarter, reflecting sustained enterprise adoption of Azure, Microsoft 365, and related cloud offerings across global markets and industry verticals.

Azure and other cloud services revenue increased 39% on a GAAP basis and 38% in constant currency, maintaining the accelerated growth trajectory established in recent quarters. The performance exceeded the 40% growth rate achieved in the first quarter of fiscal year 2026, though represented a slight moderation from that peak. According to metrics data, Azure growth has consistently remained in the high 30% range throughout fiscal year 2025, with rates of 31% in Q2 FY25, 33% in Q3 FY25, and 39% in Q4 FY25 before reaching 40% in Q1 FY26.

Commercial remaining performance obligation increased 110% to $625 billion, according to the press release, representing a dramatic acceleration from the 51% growth to $392 billion reported in the first quarter of fiscal year 2026. The backlog figure reflects contracted future revenue commitments from enterprise customers and indicates sustained demand for Microsoft's cloud infrastructure and services over an extended time horizon.

The Intelligent Cloud segment generated operating income of $13.9 billion on revenue of $32.9 billion, yielding an operating margin of approximately 42%. Cost of revenue for the segment reached $13.6 billion, up from $9.4 billion in the prior year period, reflecting the infrastructure investments required to support the accelerating cloud business growth. Operating expenses for Intelligent Cloud totaled $5.5 billion compared to $5.3 billion one year earlier.

Productivity services maintain double-digit expansion

The Productivity and Business Processes segment produced revenue of $34.1 billion and increased 16% on a GAAP basis and 14% in constant currency. Operating income for the segment reached $20.6 billion compared to $16.9 billion in the second quarter of fiscal year 2025, yielding an operating margin of approximately 60% that demonstrates the high profitability of Microsoft's productivity software and business process applications.

Microsoft 365 Commercial cloud revenue increased 17% on a GAAP basis and 14% in constant currency, maintaining consistent growth rates across multiple quarters. According to metrics data, Microsoft 365 Commercial cloud revenue growth has remained in the 15-18% range throughout fiscal year 2025 and into fiscal year 2026, with quarterly rates of 16%, 12%, 18%, 17%, and 17% across the past five reporting periods.

Seat growth for Microsoft 365 Commercial offerings reached 6% year-over-year, consistent with the growth rate maintained throughout fiscal year 2025, according to investor metrics. The stable seat expansion indicates Microsoft is maintaining its enterprise customer base while extracting additional revenue per user through premium features, AI-powered capabilities, and expanded service offerings integrated into the Microsoft 365 platform.

Microsoft 365 Consumer cloud revenue increased 29% on a GAAP basis and 27% in constant currency, representing substantial acceleration from the 26% GAAP growth and 25% constant currency growth achieved in the first quarter of fiscal year 2026. The consumer subscription business has demonstrated improving momentum, with growth rates expanding from 8% in Q2 FY25 to 10% in Q3 FY25, 20% in Q4 FY25, 26% in Q1 FY26, and now 29% in Q2 FY26, according to the metrics progression.

LinkedIn revenue increased 11% on a GAAP basis and 10% in constant currency, representing acceleration from the 10% GAAP and 9% constant currency growth achieved in the first quarter. The professional networking platform has maintained single-digit to low double-digit growth throughout recent quarters, with rates of 9%, 7%, 9%, 10%, and now 11% across the past five reporting periods. LinkedIn's contribution to total Productivity and Business Processes revenue continues expanding as the platform develops advertising capabilities and premium subscription offerings for business professionals.

Dynamics 365 revenue increased 19% on a GAAP basis and 17% in constant currency, consistent with growth rates maintained throughout fiscal year 2025. The enterprise resource planning and customer relationship management applications have demonstrated stable expansion, with quarterly growth rates ranging from 16% to 23% across recent reporting periods, according to metrics data.

Financial performance and shareholder returns

Net income on a GAAP basis reached $38.5 billion for the quarter and increased 60% compared to the second quarter of fiscal year 2025. The substantial increase resulted from net gains of $7.6 billion from investments in OpenAI, which boosted diluted earnings per share by $1.02 according to the non-GAAP reconciliation provided in the press release. Excluding the impact from OpenAI investments, net income on a non-GAAP basis reached $30.9 billion and increased 23% on a GAAP basis and 21% in constant currency.

Diluted earnings per share on a GAAP basis reached $5.16 and increased 60%, while non-GAAP diluted earnings per share totaled $4.14 and increased 24% on a GAAP basis and 21% in constant currency. The non-GAAP figures exclude the $1.02 per share benefit from OpenAI investment gains in the current quarter and the $0.12 per share negative impact from OpenAI investment losses in the second quarter of fiscal year 2025.

Operating income totaled $38.3 billion and increased 21% on a GAAP basis and 19% in constant currency. The operating margin reached approximately 47% based on total revenue of $81.3 billion, demonstrating Microsoft's ability to maintain profitability while simultaneously investing heavily in artificial intelligence infrastructure and capacity expansion across multiple geographies.

Microsoft returned $12.7 billion to shareholders through dividends and share repurchases during the second quarter of fiscal year 2026, representing an increase of 32% compared to the second quarter of fiscal year 2025, according to the press release. Dividend payments totaled $6.8 billion while share repurchases reached $5.9 billion based on cash flow statement data. The capital allocation demonstrates Microsoft's commitment to returning value to shareholders even as the company maintains aggressive investment in growth opportunities.

OpenAI relationship and strategic positioning

The OpenAI investment generated net gains of $7.6 billion during the quarter, representing a substantial swing from the $939 million in net losses recorded in the second quarter of fiscal year 2025. The mark-to-market accounting treatment reflects changes in the valuation of Microsoft's stake in the artificial intelligence research organization, which the company has restructured through multiple partnership modifications throughout fiscal year 2025 and fiscal year 2026.

Nadella referenced the expanding AI business during the earnings call. "We are in the beginning phases of AI diffusion and its broad GDP impact," he stated. "In fact, even in these early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build." The commentary positions artificial intelligence as a fundamental growth driver across Microsoft's product portfolio rather than a standalone business segment.

The company added support for GPT 5.2 and Claude 4.5 models on its Foundry platform during the quarter, according to Nadella's prepared remarks. "Already, over 1,500 customers have used both Anthropic and OpenAI models on Foundry," he noted, indicating growing enterprise adoption of large language model capabilities for business applications. The model catalog expansion reflects Microsoft's strategy of providing broad model choice to customers while optimizing for cost, latency, and performance requirements across different workloads.

Microsoft achieved a 50% increase in throughput for OpenAI inferencing workloads powering Copilot services, according to Nadella's commentary during the call. The performance improvement demonstrates ongoing optimization of the infrastructure supporting AI-powered features across Microsoft's product portfolio, including Microsoft 365 Copilot, GitHub Copilot, and Dynamics 365 Copilot offerings.

Marketing implications and competitive positioning

The search advertising growth slowdown carries significant implications for the marketing community. The 10% growth rate represents a substantial deceleration from the 21% rates maintained throughout fiscal year 2025, suggesting potential headwinds in advertiser demand, competitive pressure from larger platforms, or strategic prioritization of other business segments over advertising revenue optimization.

Microsoft's total advertising revenue surpassed $20 billion annually by April 2025, with search and news advertising representing a substantial portion of that figure alongside LinkedIn Marketing Solutions and gaming advertising inventory. The overall advertising business has benefited from AI integration, with research showing Copilot achieving 73% higher click-through rates compared to traditional search advertising, according to data published by Microsoft Advertising.

The company maintains approximately 5% global search market share through Bing, competing primarily against Google's dominant position while differentiating through conversational AI features and integration with Windows, Edge, and Office products. Microsoft Advertising disclosed that exact match keywords receive absolute priority over Performance Max campaigns when competing for identical placements, regardless of Ad Rank differences, representing a notable point of differentiation from competitor platforms.

LinkedIn's 11% revenue growth suggests the professional networking platform continues attracting marketing investment despite broader economic uncertainties. The platform has emerged as the top B2B advertising channel, with research showing 113% return on ad spend and 39% of B2B advertising budgets allocated to LinkedIn according to benchmark data published in 2025. The platform enhanced its Revenue Attribution Report with company-level measurement capabilities, enabling marketers to track campaign influence from first touch to closed deals.

Outlook and forward guidance

Microsoft did not provide specific forward-looking guidance for search advertising revenue in the third quarter of fiscal year 2026 during the earnings call. The company stated it would provide detailed outlook commentary through supplemental slides made available on the Microsoft Investor Relations website following the call, consistent with its standard practice for quarterly earnings announcements.

The commercial bookings growth of 230% on a GAAP basis and 228% in constant currency suggests sustained enterprise demand for Microsoft's cloud and productivity services, though the figure includes the commercial portion of LinkedIn and may be influenced by large individual contracts. Commercial remaining performance obligation of $625 billion represents contracted future revenue that will flow through Microsoft's business segments over an extended time horizon, providing visibility into sustained growth opportunities.

Capital expenditures reached $72.4 billion for the first six months of fiscal year 2026 based on quarterly figures of $34.9 billion in Q1 and $37.5 billion in Q2. The aggressive infrastructure investment trajectory supports Microsoft's positioning in artificial intelligence and cloud services but also represents significant near-term capital allocation that could impact other business priorities including advertising platform development and optimization.

The company generated operating cash flow of $80.8 billion for the six-month period ended December 31, 2025, up from $56.5 billion in the corresponding period of fiscal year 2025, according to cash flow statements. The substantial cash generation provides Microsoft with financial flexibility to sustain infrastructure investments, return capital to shareholders, and pursue strategic opportunities across business segments including advertising technology and platform capabilities.

Timeline

Summary

Who: Microsoft Corporation, led by Chairman and Chief Executive Officer Satya Nadella and Chief Financial Officer Amy Hood, announced financial results affecting shareholders, enterprise customers, developers, advertising partners, and the broader technology ecosystem.

What: Microsoft reported second quarter fiscal year 2026 revenue of $81.3 billion representing 17% growth, with Microsoft Cloud revenue surpassing $50 billion for the first time and increasing 26%. Search and news advertising revenue excluding traffic acquisition costs reached $3.8 billion and increased 10%, marking the slowest quarterly growth rate for the segment since fiscal year 2024. The company disclosed capital expenditures of $37.5 billion, net income of $38.5 billion including $7.6 billion in OpenAI investment gains, and commercial remaining performance obligation of $625 billion.

When: The results cover the quarter ended December 31, 2025, and were announced on January 28, 2026, during the company's earnings conference call and webcast.

Where: Microsoft's business operates globally across cloud infrastructure, productivity software, and advertising platforms including Bing search engine, Edge browser, LinkedIn professional networking, and gaming properties, with datacenter expansion announced in seven countries during the quarter to support local data residency requirements.

Why: Search advertising growth decelerated from 21% rates maintained throughout fiscal year 2025 to 10% in the second quarter of fiscal year 2026 as Microsoft prioritized substantial infrastructure investments totaling $72.4 billion in the first six months of the fiscal year to support artificial intelligence and cloud services expansion, while overall company performance exceeded expectations across revenue, operating income, and earnings per share driven by Azure growth of 39% and Microsoft Cloud reaching the $50 billion quarterly milestone.

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