The quarter against our forecast
Q1 FY27 line by line, as the income statement shows it
| Line | Outlook | Our forecast | Reported | Against our forecast |
|---|---|---|---|---|
| Revenue | $89.8B–$91.0B | $91.9B | $92.3B | +0.4%beat |
| Product | — | — | $14.6B | not in our forecast |
| Service and Other | — | — | $77.6B | not in our forecast |
| Intelligent Cloud | — | $41.9B | — | with the 10-Q |
| More Personal Computing | — | $12.6B | — | with the 10-Q |
| Productivity and Business Processes | — | $37.4B | — | with the 10-Q |
| Cost of revenue | — | $29.9B | $29.7B | −0.7%beat |
| Product | — | — | $2.47B | not in our forecast |
| Service and Other | — | — | $27.2B | not in our forecast |
| Gross margin | — | $62.0B | $62.6B | +1.0%beat |
| Gross margin | — | 67.4% | 67.8% | +0.4 ptbeat |
| Research and development | — | $8.92B | $9.05B | +1.4%miss |
| Sales and marketing | — | $6.07B | $5.72B | −5.8%beat |
| General and administrative | — | $1.93B | $1.88B | −2.5%beat |
| Operating income | — | $45.0B | $45.9B | +1.9%beat |
| Operating margin | — | 49.0% | 49.8% | +0.7 ptbeat |
| Other income (expense), net | — | −$183M | $38.0M | −120.7%beat |
| Income before income taxes | — | $44.9B | $46.0B | +2.4%beat |
| Provision for income taxes | — | $8.97B | $9.32B | +3.9%miss |
| Tax rate | — | 20.0% | 20.3% | +0.3 ptmiss |
| Net income | — | $35.9B | $36.6B | +2.0%beat |
| Diluted | — | 7.44B | 7.45B | +0.01Bmiss |
| Adjusted EPS | — | $4.84 | $4.89 | +5¢beat |
Our forecast was frozen before the release: the average of 6 models as of 2026-10-27 06:00:22 ET. Each reported number is quoted from the release; the 10-Q's tagged facts confirm the statement's lines when it is filed. Read before our lock: the SEC lists the release in its index that night, and the next check confirms its bytes. A cost above our forecast is a miss.
Why the quarter differed from our forecast
Net income+2.0%
What we assumedThe forecasts left any OpenAI gain or loss out, taking other income near the company's guide excluding OpenAI.the OpenAI item is left out of both reported and adjusted figures because it cannot be forecast
opus
What the company printedGAAP net income included net gains from investments in OpenAI, on top of the operating beat.Impact from investments in OpenAI. In the first quarter of fiscal year 2027, net income and diluted earnings per share were impacted by net gains from investments in OpenAI, which resulted in an increase in net income and diluted earnings per share of $207 million and $0.03, respectively. In the first quarter of fiscal year 2026, net income and diluted earnings per share were impacted by net losses from investments in OpenAI, which resulted in a decrease in net income and diluted earnings per share of $3.1 billion and $0.41, respectively.
Known before our cutoff?No: Searched filings before the cutoff for the first-quarter OpenAI result; nothing found, the gain was first printed in the release.
Operating income+1.9%
What we assumedThe forecasts held operating expenses at the company's guide, with costs landing near guidance even as revenue beat.so I keep cost of revenue near 30 billion and operating expenses near 16.9 billion
opus
What the company printedOperating expenses came in below the guide; sales and marketing was flat on a year earlier.Sales and marketing 5,716 5,717
Known before our cutoff?No: Searched filings after the July call for any lower expense outlook; the September restatement left the expense guide unchanged.
Gross margin+1.0%
What we assumedThe forecasts set cost of revenue a little above the company's guide, for an AI-heavy mix.I take cost of revenue at 30.0 billion dollars, a little above the 29.6 to 29.8 billion guide to reflect the AI-heavy mix
deepseek
What the company printedCost of revenue landed inside the guided range while revenue beat, lifting gross margin.Total cost of revenue 29,720 24,043
Known before our cutoff?Yes: The July fourth-quarter call gave the cost-of-revenue range the company then met.Hardware revenue should decline year-over-year. Therefore, at the total company level, revenue should be between 89.85 and 90.95 billion U.S. dollars, or growth of 16 to 17 percent, with accelerating commercial growth, partially offset by the impact from the PC market dynamics noted earlier. We expect COGS of 29.6 to 29.8 billion U.S. dollars, or growth of 23 to 24 percent, An operating expense of $16.8 to $16.9 billion U.S. dollars, a growth of 7 to 8 percent, driven by continued investment in R&D compute capacity and talent.
Revenue+0.4%
What we assumedThe forecasts put revenue above the guided midpoint, repeating the company's record of beats.I put the middle about 1.8 billion dollars above its midpoint because the company has beaten its midpoint by 1.2 to 2.7 billion dollars in each of the last four quarters.
opus
What the company printedTotal revenue landed above the top of the guided range, slightly above the forecasts.Total revenue 92,279 77,673
Known before our cutoff?Yes: The July fourth-quarter call gave the revenue range the forecasts built on.Hardware revenue should decline year-over-year. Therefore, at the total company level, revenue should be between 89.85 and 90.95 billion U.S. dollars, or growth of 16 to 17 percent, with accelerating commercial growth, partially offset by the impact from the PC market dynamics noted earlier. We expect COGS of 29.6 to 29.8 billion U.S. dollars, or growth of 23 to 24 percent, An operating expense of $16.8 to $16.9 billion U.S. dollars, a growth of 7 to 8 percent, driven by continued investment in R&D compute capacity and talent.
The company's new outlook
The release states no outlook: "Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast."
Each item as the release prints it. Our forecast stands beside an item only when the item is one of our two numbers, for our quarter or year, in our unit.
The company's reasons, from the release
- GAAP net income and EPS lifted by OpenAI investment gains “Impact from investments in OpenAI. In the first quarter of fiscal year 2027, net income and diluted earnings per share were impacted by net gains from investments in OpenAI, which resulted in an increase in net income and diluted earnings per share of $207 million and $0.03, respectively. In the first quarter of fiscal year 2026, net income and diluted earnings per share were impacted by net losses from investments in OpenAI, which resulted in a decrease in net income and diluted earnings per share of $3.1 billion and $0.41, respectively.”
- Microsoft 365 commercial cloud growth vs prior-year in-period revenue benefit “Microsoft 365 commercial cloud revenue increased 18% (up 19% in constant currency) on an adjusted basis, normalized for a 1-point benefit from in-period revenue recognition in the prior year, and increased 17% (up 18% in constant currency) on a reported basis”