Microsoft reported fiscal third-quarter results after the bell Wednesday, posting revenue of $70.4 billion, up 13 percent year over year, and diluted EPS of $3.42, both ahead of Wall Street’s consensus, the company said in its earnings release. Operating income reached $32.1 billion as Azure and AI-driven productivity tools continued to outrun the broader software business.
Shares slipped roughly 3 percent in extended trading, however, after CFO Amy Hood said capital expenditures would “continue to grow” through fiscal 2027, with full-year fiscal 2026 capex now tracking above $90 billion — a figure that has rattled investors already weighing the durability of the AI infrastructure cycle.
Azure: AI services drive half of growth
Intelligent Cloud revenue rose 22 percent to $30.8 billion, with Azure and other cloud services growing 33 percent in constant currency. Hood attributed roughly 16 percentage points of that growth to AI services, including the OpenAI compute partnership and Microsoft’s first-party Phi-4 inference offerings.
That AI-services contribution is up from 13 points in the prior quarter and marks the highest disclosed share since Microsoft began breaking out the metric in fiscal 2024. CEO Satya Nadella said on the earnings call that Azure AI now serves “more than 60,000 paying customers” and that customer commitment for the next twelve months reached a record $315 billion in remaining performance obligations, a 28 percent year-on-year increase.
Copilot ARR crosses $15 billion as enterprise attach climbs
The Productivity and Business Processes segment generated $32.1 billion, up 14 percent. Microsoft said Microsoft 365 Copilot annual recurring revenue is now “above $15 billion,” nearly doubling from $8 billion six months ago, with attach rates among Microsoft 365 E5 enterprise customers climbing to 41 percent, according to the company’s prepared remarks.
GitHub Copilot Enterprise, billed separately, crossed 4 million paid seats with annualized revenue near $1.2 billion, Nadella told analysts. Dynamics 365 grew 25 percent, helped by Copilot for Sales and the new agentic Copilot Studio runtime that began general availability in March.
Capex bill widens — and it isn’t slowing
Capital expenditures for the quarter hit a record $22.4 billion, up 51 percent year over year, with Hood guiding to a “sequential step-up” in the June quarter as the company brings additional Stargate-aligned data-center capacity online in Texas and Wisconsin. Free cash flow came in at $19.6 billion, down 7 percent — the second straight quarter of free-cash-flow contraction as AI build-out outpaces cash generation.
Microsoft also disclosed it had taken delivery of “the first commercial shipments” of Nvidia’s Blackwell Ultra GB300 systems during the quarter and is co-engineering the next-generation Cobalt 200 Arm server CPU with TSMC for fiscal 2027 deployment.
Outlook: investors want a payoff window
For the fourth fiscal quarter, Microsoft guided revenue of $73.5–$74.7 billion, slightly above the $73.1 billion analyst consensus, per LSEG IBES. But executives declined to commit to a “peak capex” timeline — a point that drew sharp questioning from analysts at Morgan Stanley and Bernstein on the call.
“The AI capex cycle is real, sustained, and global,” Nadella said. “We will continue to invest where we see customer demand.”
For Wall Street, the question is no longer whether enterprises are buying AI — Microsoft just answered it — but when the spending curve will start to bend. With Apple and Amazon set to report Thursday and Friday, the bar for AI capex justification keeps rising across the hyperscaler cohort.
Discussion
Sign in to join the discussion.
No comments yet. Be the first to share your thoughts.