Microsoft earnings: AI-fuelled growth meets capital spending reality

Key points:

A strong start overshadowed by spending

Microsoft kicked off its new fiscal year with broad-based strength across cloud, productivity and personal computing. The numbers were impressive across the board:

• Revenue: USD 77.7 billion, up 18% year-on-year
• Operating income: USD 38.0 billion, up 24%
• Adjusted net income: USD 30.8 billion, up 22%
• Adjusted earnings per share: USD 4.13, ahead of forecasts of USD 3.67
• Microsoft Cloud revenue: USD 49.1 billion, up 26%
• Azure and other cloud services: up 40%
• Capital expenditures: USD 34.9 billion, up 74% from a year earlier

Despite the strong results, Microsoft’s shares fell more than 2% in after-hours trading as investors focused on the surge in capital spending.

The company’s Intelligent Cloud division was again the powerhouse, delivering 28% growth to USD 30.9 billion. Productivity and Business Processes, home to Microsoft 365 and LinkedIn, expanded 17%, while the More Personal Computing division grew 4%, supported by Windows and search advertising.

But the number that caught everyone’s attention wasn’t revenue or profit, it was spending. Microsoft’s capital expenditures, including leases, hit a record USD 34.9 billion, far above expectations of about USD 30 billion. The increase, driven by data centre expansion and AI infrastructure, shows how aggressively Microsoft is investing to secure capacity for its AI ambitions.

The AI flywheel keeps spinning

Microsoft’s AI momentum shows no sign of slowing. Its partnership with OpenAI remains a cornerstone of its competitive edge. The two companies recently restructured their collaboration, giving Microsoft a roughly 27% stake in OpenAI’s new for-profit entity and exclusive access to its technology through 2032.

OpenAI also committed to purchasing USD 250 billion worth of computing power from Microsoft, more than triple Azure’s total cloud sales last fiscal year. The deepening partnership underscores how the two companies have become symbiotic, each powering the other’s growth.

AI is becoming the new computing platform, and Microsoft is positioning itself as the factory that powers it. The scale and speed of investment show both the size of the opportunity and the cost of staying ahead. Azure’s 40% growth proves that customers continue to embrace Microsoft’s cloud and AI ecosystem, but the company acknowledged that demand for AI computing already exceeds available capacity, forcing it to accelerate data centre buildouts around the world.

But behind that success lies an enormous price tag.

Capital intensity meets market anxiety

This quarter revealed a delicate balance between capturing AI leadership and maintaining financial discipline. While gross margin improved by three percentage points to 69%, the ballooning capital expenditures have begun to test investor patience.

Microsoft’s cash from operations climbed 32% to USD 45.1 billion, but free cash flow fell 30% sequentially due to heavy infrastructure spending. With the company planning to sustain elevated investment levels through fiscal 2026, questions are emerging about how quickly these outlays will translate into returns.

Chief Financial Officer Amy Hood summed it up bluntly: “I thought we were going to catch up. We are not. Demand is increasing.” The remark encapsulated Microsoft’s biggest challenge: demand for cloud and AI services is rising faster than even its record spending can match.

One key reassurance came from the company’s massive order book. Commercial remaining performance obligations surged 51% to USD 392 billion, with an average contract duration of just two years. That means much of the future revenue is already locked in and will materialise relatively soon, helping justify today’s outsized investment pace.

Microsoft is essentially building the digital equivalent of the world’s power grid for AI. But even the strongest balance sheet has limits, and some are beginning to wonder how long this investment pace can continue before it starts to pressure margins. The company’s capital intensity now rivals chip foundries and hyperscalers like Amazon and Google, a sign of just how costly the AI race has become.

Looking ahead, Microsoft guided for revenue of USD 79.5–80.6 billion next quarter, with Azure expected to grow about 37% in constant currency. Management also warned that capacity constraints will persist through the rest of the fiscal year.

Broader business shows resilience

Beyond AI and cloud, Microsoft’s traditional businesses remain solid. Office 365 Commercial revenue rose 17%, while consumer subscriptions climbed 26%, supported by strong adoption of Copilot and premium tiers. LinkedIn revenue grew 10%, Dynamics 365 expanded 18%, and search advertising excluding traffic costs jumped 16%, confirming that growth is broad-based rather than concentrated in AI alone.

The More Personal Computing segment, which includes Windows and Xbox, grew 4% as Windows OEM revenue increased 6% thanks to early PC upgrades ahead of new tariffs, partially offset by weaker device sales. Microsoft also returned USD 10.7 billion to shareholders through dividends and buybacks, showing that despite the surge in spending, cash generation remains robust.

The path ahead: turning scale into returns

The road forward is about balancing relentless AI expansion with profitability discipline. Management reiterated its commitment to continued investment in data centres and talent to capture what it calls a “massive opportunity” in AI.

Chief Executive Satya Nadella described Microsoft’s infrastructure as a “planet-scale token factory”, a continuously modernised, fungible network of data centres optimised to maximise efficiency and return on investment. In practice, that means Microsoft’s AI fleet can be upgraded each year to newer hardware while using software optimisation to extract more computing power per watt. The company argues this approach makes its spending not just aggressive but also adaptive and sustainable.

Yet the company also faces mounting scrutiny over potential overcapacity, competitive pressure from Amazon and Google, and a wider debate over how quickly AI-driven revenue can offset the capital outlays. Microsoft and its peers are expected to spend roughly USD 400 billion collectively on AI infrastructure this year, a figure that illustrates both ambition and risk.

Some analysts questioned whether the surge in AI spending risks inflating a bubble. Microsoft pushed back, stressing that growth is tied to real usage, booked contracts and accelerating customer demand, not speculative bets.

For investors, this means two things. Short-term volatility is likely to persist as heavy spending and shifting sentiment create swings in valuation. But over the long run, Microsoft’s entrenched position in AI infrastructure and enterprise software gives it a uniquely powerful foundation for durable growth.

Why this quarter matters

Microsoft’s latest results reaffirm its status as the central player in the global AI race, profitable, ambitious and willing to spend heavily to maintain its lead. The company is executing strongly across its businesses, but the price tag for that success is climbing fast.

The key question now is how efficiently Microsoft can turn its massive investments into monetisation. The company is effectively turning data centres into the new oil fields of the digital era, and investors are watching closely to see how effectively it can extract value from them.

Microsoft’s quarter captured the new reality of Big Tech: the AI boom has moved from code to concrete. The company is not just training models, it is laying the physical foundation for the next era of computing.

Ultimately, this quarter showed that building the future of computing doesn’t come cheap, but for Microsoft, the investment still looks worth it.

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