Microsoft's annual capital expenditure soared to $190 billion, with AI and Azure driving revenue beyond expectations

According to Canalys, Microsoft reported its FY26 Q3 (ending March 31) financial results, with revenue of $828.9 billion, an 18% year-over-year increase, exceeding analysts' expectations of $813.9 billion. Adjusted earnings per share were $4.27, higher than the expected $4.06. Operating income was $38.4 billion, up 20% year-over-year.

Azure and other cloud services revenue grew by 40% (39% at constant exchange rates), surpassing the management's prior guidance of 37% to 38%. Previously, Azure's growth rate had decreased from 40% in Q1 to 39% in Q2, and after the lower Q3 guidance, there were concerns in the market about a slowdown becoming a trend. Following the Q2 earnings report, Microsoft's market value plummeted by $357 billion in a single day. Reaching 40% growth this time directly reversed the narrative of two consecutive quarters of deceleration.

The AI business's annualized revenue was $37 billion, a 123% year-over-year increase. Microsoft 365 Copilot paid seats crossed 20 million, up from 15 million in January. CEO Nadella stated that Copilot's weekly active usage has now matched Outlook's. Overall Microsoft's cloud revenue was $54.5 billion, up 29%. Commercial remaining performance obligation (contracted not billed) was $627 billion, nearly double.

Capital expenditures (including finance leases) were $31.9 billion, a 49% increase year-over-year, but lower than analysts' expected approximately $35.29 billion by $3.4 billion. CFO Amy Hood raised the full-year capital expenditure estimate to $190 billion, with around $25 billion coming from component price hikes, far exceeding analysts' previous estimate of $154.6 billion. The gross margin declined to 67.6%, the lowest since 2022, mainly due to rising data center depreciation costs.

Microsoft also announced a restructuring of its partnership with OpenAI during the same week: canceling the revenue share to OpenAI, maintaining Azure as OpenAI's primary cloud platform, and a non-exclusive model license until 2032. Nadella stated in the earnings call that Microsoft has royalty-free use of OpenAI's cutting-edge models, and "we fully intend to leverage that."

For Q4, revenue guidance is set at $87 billion to $87.8 billion, with the midpoint slightly below the expected $87.53 billion. Azure is guided to grow at 39% to 40% at constant exchange rates, higher than analysts' expected 37%.