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Microsoft FY26 Q2 Results Focus on Copilot
Microsoft released their FY26 Q2 results on January 28, 2026. Two items stood out from a Microsoft 365 perspective. First, Microsoft reported a number for Microsoft 365 Copilot licenses (15 million), the first time that Microsoft has given a number for paid Microsoft 365 Copilot seats. Second, Microsoft said that the number of paid commercial Microsoft 365 seats now exceeds 450 million, a small increase from the 446 million reported last quarter. Microsoft reported a 6% year-over-year growth for Microsoft 365 seats. Given these numbers, it seems like Microsoft 365 Copilot is used by 3.33% of the installed base.
Quarterly revenues for the Microsoft Cloud hit $51.5 billion, or $206 billion ARR. Microsoft said that “Microsoft Cloud gross margin percentage was slightly better than expected at 67%,” underlining the highly profitable nature of its Microsoft 365, LinkedIn, and Azure solutions which constitute the majority of Microsoft Cloud income.
Microsoft 365 Copilot Revenue
Microsoft 365 revenue increased 17% (14% in constant currency). As is their habit when discussing quarterly results with analysts, Microsoft attributed the growth in average revenue per user (ARPU) to customer purchases of E5 and Microsoft 365 Copilot licenses.
At list price, the 15 million paid licenses for Microsoft 365 Copilot represent $5.4 billion annual revenue. Microsoft said that the 15 million represents a 160% year-over-year growth in seats. $5.4 billion is a good number, but the number pails against the ongoing capital investment Microsoft makes to support AI. CFO Amy Hood said that “capital expenditures were $37.5 billion, and this quarter, roughly two thirds of our capex was on short-lived assets, primarily GPUs and CPUs.”
Microsoft also said that Copilot “is becoming a true daily habit, with daily active users increasing 10X year-over-year.” They threw in a meaningless statistic when saying that “24 billion Copilot interactions were audited by Purview this quarter, up 9X year-over-year.” Given that Purview captures audit records for all Copilot interactions, this kind of statistic does not give an accurate insight into the activity levels of Microsoft 365 Copilot users. I assume that the people use Copilot more as they become more familiar with its capabilities allied to the availability of new agents like Researcher.
The investment in Copilot across Microsoft 365 reduces engineering budget in other areas. One example is the announcement to partners that Microsoft plans to retire the standalone SharePoint Online and OneDrive for Business plan 1 and 2 SKUs. The reasons cited are “low customer demand for standalone offerings, increased instances of unintended or nonstandard usage, and higher operational costs.” Given the increased integration of SharePoint Online and OneDrive for Business with the rest of the Microsoft 365 suite, selling a standalone offering doesn’t make as much sense in 2026 as it did when Office 365 launched in 2011.
GitHub Copilot
I like GitHub Copilot and recommend it to every Microsoft 365 administrator who works with PowerShell. Microsoft says that there are now 4.7 million paid GitHub Copilot subscribers, up 75% year-over-year as people come to appreciate the advantages of AI-assisted development. Like any assistant, the suggestions made by Copilot are not perfect, but it does accelerate progress and that’s all that counts.
Satya Nadella referenced the GitHub Copilot SDK and its ability to bring Microsoft 365 content into the development cycle. For example, while working in Visual Studio Code, a developer can retrieve relevant messages and files to allow them to check information like program requirements. It’s an example of what Microsoft calls WorkIQ.
License Increases Will Drive Higher Microsoft 365 Revenues
Things look good for Microsoft 365 revenues over the coming months. Revenue growth through an increase in overall commercial seat count (solidly 6% annually on average over the last few years) will be turbocharged by license increases coming in June 2026. If 450 million Microsoft 365 users pay an average $2 extra per month, that’s $10.8 billion extra revenue. Which is nice.
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