Review|MSFT 2Q26: The Market is Only Beginning to Reward Better ROI

Results

1. Copilot
   1. In our previous Preview, we noted that positive channel feedback suggested Copilot seat growth and enterprise deployments could exceed expectations.
      1. Microsoft disclosed more than 30 million paid M365 Copilot seats this quarter, with roughly 10 million net additions versus approximately 5 million in the prior quarter. The clear acceleration was consistent with the positive trend from our channel checks. E7 has also reached several million seats since launch.
      2. M365 Commercial Cloud revenue grew 14% YoY cc, slightly above consensus and at the high end of company guidance, but below some higher market expectations. Several large customers expanded Copilot deployments and placed initial E7 orders only near fiscal year-end, while Cowork did not reach GA until June, limiting their contribution to the quarter. In addition, enterprise-wide deployments typically come with higher discounts, while more base-seat additions came from lower-ARPU SMB and frontline-worker SKUs. As a result, seat growth has not yet fully translated into quarterly ARPU or revenue.
      3. Management expects M365 Commercial Cloud revenue growth to accelerate progressively through FY27 as contributions from Copilot, E7 and Cowork flow through.
   2. Copilot's monetization model is expanding from per-seat pricing to a combination of seats and usage.
      1. E7 includes Microsoft 365 Copilot and Agent 365 in the seat-based subscription. Agentic features such as Cowork are billed separately through Copilot Credits, while GitHub Copilot has also introduced usage-based billing.
      2. After GitHub Copilot introduced usage-based billing, consumption revenue ramped quickly. GitHub Copilot revenue grew more than 60% QoQ this quarter, while margins improved through the quarter.