Azure cloud growth accelerates to 43%, fueled by AI demand, as Microsoft holds firm on capital expenditure plans for the year ahead.
Microsoft shares surged roughly 8% in after-hours trading following the release of the company's fiscal fourth-quarter earnings, which topped Wall Street expectations across nearly every major business segment. The rally came after the software giant confirmed it would maintain its 2026 capital spending targets while signaling even greater investment ahead in fiscal 2027.
Earnings Beat Expectations Across the Board
For the quarter ended June 30, Microsoft reported adjusted earnings of $4.74 per share on revenue of $90.01 billion, both comfortably ahead of analyst forecasts compiled by LSEG, which had called for $4.24 per share and $87.62 billion in sales. Overall revenue climbed about 18% year-over-year.
Net income came in at $35.77 billion, or $4.81 per share, a sharp jump from the $27.23 billion, or $3.65 per share, the company posted a year earlier. Part of that gain stemmed from a multi-billion-dollar boost tied to Microsoft's equity stake in AI research company Anthropic, along with savings from the company's first voluntary retirement program. An impairment charge tied to the Xbox gaming division partially offset those gains.
Despite the strong quarter, Microsoft stock had still been down close to 19% for the year heading into the report, reflecting a broader pullback in software stocks as investors weigh how generative AI could reshape the industry.
Azure Cloud Business Crosses $100 Billion Milestone
The standout performer was once again Microsoft's cloud division. The Intelligent Cloud segment, which houses Azure, generated $39.31 billion in revenue, up nearly 32% from a year earlier and above analyst estimates. Growth in Azure specifically accelerated to 43% on a constant-currency basis, up from 40% the previous quarter and ahead of what analysts had projected.
Microsoft disclosed that Azure's full fiscal-year revenue surpassed $100 billion for the first time, marking a 41% increase. That puts Azure behind market leader Amazon Web Services but still ahead of Google Cloud. Looking to the current quarter, finance chief Amy Hood projected Azure growth of 45% at constant currency, well above the roughly 41% analysts had penciled in.
Capital Spending to Keep Climbing Into 2027
One of the most closely watched aspects of the report was Microsoft's spending outlook. Hood reaffirmed the company's already-disclosed 2026 capital expenditure plans, while noting a change in accounting: the useful life of office and data center buildings will be extended from 15 to 25 years, and a greater share of future data center leases will be classified as operating leases rather than finance leases. That shift is expected to bring total capital expenditures and finance leases to approximately $175 billion for the year.
Looking further out, Hood said she expects capital spending to increase again in fiscal 2027, pointing to continued demand signals across Microsoft's business lines. Capital expenditures and finance leases for the quarter just reported totaled $41 billion, up 69% from a year earlier.
Free cash flow told a different story, falling 23% to $19.64 billion as heavy infrastructure investment weighed on the metric. Hood said she still expects Microsoft to generate positive free cash flow in fiscal 2027.
Copilot Adoption and OpenAI Concentration Risk
Microsoft highlighted continued momentum for its AI products, noting that paid seats for Microsoft 365 Copilot surpassed 30 million, up from more than 20 million just a few months earlier. CEO Satya Nadella also said GitHub Copilot, the company's AI coding assistant, has reached 50 million users, with numerous large enterprise customers adopting premium productivity bundles.
Still, analysts have flagged risks tied to Microsoft's reliance on OpenAI. The company noted in January that nearly half of its $625 billion in commercial remaining performance obligations were linked to OpenAI, a dependency that some analysts say could become more pronounced as open-source AI models gain traction. Commercial remaining performance obligations overall rose 8% quarter-over-quarter to $678 billion, driven largely by customers outside the AI model-development space.
Other Segment Highlights
Productivity and Business Processes, which includes Office, LinkedIn, and Dynamics, brought in $37.85 billion, up 14.3% and ahead of consensus estimates. The More Personal Computing segment — covering Windows, Surface, Bing, and Xbox — posted $12.85 billion in revenue, down 4.4% but still better than analysts expected.
Xbox revenue fell 10% during the quarter, coinciding with previously announced job cuts and the spinoff of four game studios. Windows device licensing revenue also declined 7%, broadly in line with an industry-wide drop in PC shipments.
Looking Ahead
For the current fiscal quarter, Microsoft guided to revenue between $89.85 billion and $90.95 billion, which would represent roughly 16% growth at the midpoint — ahead of the $89.66 billion analysts had expected.
With Azure demand still accelerating and AI-driven products scaling rapidly, investors appear to be betting that Microsoft's aggressive infrastructure investment will keep paying off, even as the company navigates rising costs and questions about its dependence on OpenAI.
This article is based on Microsoft's fiscal fourth-quarter 2026 earnings report and subsequent analyst commentary.
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