Microsoft (MSFT)

Business Overview

Cloud and AI capacity turns a software margin into a capital-intensive one. FY2026 revenue (year to 30 June 2026) was $331.8B, up 17.8% from FY2025. Gross margin was 67.9% and operating margin 46.8%. Microsoft Cloud contributed $214.4B of revenue at a 66% gross margin, down from 69% a year earlier, while Azure grew 41%.

Stock-based compensation was 3.7% of revenue. Capex was $115.9B, or 34.9% of revenue, and the company also recorded $24.6B of right-of-use assets obtained under finance leases in the year (7.4% of revenue). Free cash flow (operating cash flow less capex) was $67.0B, a 20.2% margin, down from 25.4% in FY2025. After stock pay, the FCF margin was 16.4%. Remaining performance obligations stood at $684B, up from $375B, with about 30% due within twelve months. Commercial RPO was $678B. Sales and marketing ran at 8.0% of revenue. The FY2026 10-K does not disclose a numeric retention rate.

How the Numbers Read

The platform still prints a high operating margin, but cash conversion has narrowed because capacity spend now absorbs a third of revenue. Revenue growth of 17.8% plus an FCF margin of 20.2% sums to 38.0 before stock pay; after stock pay the sum is 34.2. That is the filed growth-plus-cash picture, not a pass/fail screen.

RPO at $684B is the contracted-revenue backlog under ASC 606. The current share (about 30%) tells you how much is due in the next year; contract length moves the rest without necessarily moving demand. Cloud gross margin compression from 69% to 66% sits beside the Azure growth rate and the lease additions: the same build-out that lifts contracted backlog also raises the capital charge. The RPO guide and the current-share guide place that disclosure next to peers.

How the Model Values This Kind of Company

For a diversified cloud platform, the drivers that matter are how recurring revenue retains and expands, and how much cash capacity build consumes relative to that growth. Stock pay still sits in the cash bridge, but at this scale it is usually a thinner wedge than at pure SaaS names.

Capex and the deferred-revenue inflow from prepaid contracts sit beside retention as first-order cash items. Reported free cash flow that adds stock pay back is useful for comparison; the economic read charges stock pay as a cost.

What to Watch in the Financials

Capex and finance leases as a share of revenue. 34.9% plus 7.4% in FY2026. A sustained build keeps FCF margin below the prior year's 25.4%; a pause would free cash without changing the operating margin overnight.

Microsoft Cloud gross margin. 66% in FY2026 from 69%. Mix toward Azure capacity and depreciation timing both move this line.

Current share of RPO. About 30% of $684B. A shift in contract length can change the current share while total RPO still rises.

Stock pay as a share of revenue. 3.7% in FY2026, low in the software set, so the gap between FCF before and after stock pay (20.2% vs 16.4%) is narrower than at high-stock-pay peers.

Key Risks

Capacity timing. Capex at 34.9% of revenue commits cash before utilisation of the new capacity shows up in cloud gross margin.

Cloud margin compression. The drop from 69% to 66% on Microsoft Cloud can continue if AI and Azure mix keep raising the depreciation load faster than pricing recovers it.

RPO composition. Growth in total RPO can outrun near-term revenue if more of the book sits beyond twelve months.

No filed retention rate. Without a company-stated net or gross retention figure, the recurring-revenue roll-forward has to lean on segment growth and RPO rather than a single retention input from the 10-K.