Microsoft's cloud business growth beat expectations but still upset the market

Revenue from Microsoft's cloud business grew 39% last quarter (when measured at fixed exchange rates), the company's earnings report showed. That's more than analysts expected, but only by one percentage point, Bloomberg notes. The result disappointed investors, who worry that the company is unable to effectively capitalize on the huge demand for artificial intelligence-enabled services, the agency says. However, the company's management was then able to calm the market.

Microsoft's Intelligent Cloud division, which includes Azure cloud, server products, and GitHub and Nuance services, reported revenue of $34.68 billion in the third quarter of fiscal 2026, ended March 31 - up 28% from a year ago. The consensus forecast of analysts surveyed by StreetAccount was for $34.27 billion. The AI division's annual revenue run rate (ARR) reached $37 billion, up 123% year-over-year, the company said.

Microsoft's total revenue rose 18% year-on-year to $82.89 billion. Analysts, according to LSEG, expected $81.39 billion, CNBC reported. Adjusted earnings per share rose 23% to $4.27 versus Wall Street's forecast of $4.06. Adjusted earnings exclude a $14 million decline in net income from Microsoft's investment in OpenAI, the channel noted. Net income rose 23% to $31.78 billion.

The company's shares were initially down about 3% to $408.5 in the post-market on April 29. However, they then recovered the losses and moved up about 2%. That came after CFO Amy Hood allowed for the possibility of Azure accelerating to 39% to 40% in the current quarter, which ends in June, MarketWatch reports. Analysts had only assumed 37%, the publication added. Hood also mentioned the potential for "a slight acceleration in the second half of the calendar year," it wrote.

Microsoft stock is about to end its worst quarter since 2008, CNBC notes.

Sales of the Productivity and Business Processes segment, which includes Office, LinkedIn and Dynamics, grew 17% and brought the company $35.01 billion in revenue. The StreetAccount analysts' consensus forecast was for $34.43 billion, CNBC reported.

Remaining commercial liabilities to perform (RPO) totaled $627 billion, including unrecognized revenue and future revenue. The indicator increased by $2 bln quarter-on-quarter.

Capital expenditures and lease commitments, a metric that is watched as an indicator of data center spending, totaled $31.9 billion for the quarter, up 49% from the previous quarter. Analysts had expected Microsoft to spend $35.3 billion, Bloomberg notes. At the same time, gross margin (Gross margin) was 67.6% and became the lowest since 2022, as depreciation expenses increased due to the development of the company's data center infrastructure, CNBC writes.

Last quarter, Microsoft faced a cold reaction from Wall Street following a report when it said only about 3% of its corporate user base was paying for the company's flagship artificial intelligence-based Copilot app. Microsoft has since shifted its focus from free distribution to monetizing the product, Bloomberg writes.

The decline in Microsoft shares is primarily due to concerns about weak Copilot adoption and the sustainability of Microsoft's office software business, Jefferies analyst Brent Till wrote before the report, an opinion cited by Bloomberg.

Now, the company says 20 million customers are paying for Copilot, CNBC reports. In the previous quarter, there were 15 million.

The decline in Microsoft shares is partly due to market-wide fears that AI could displace traditional software, as well as risks for the company itself: investors doubt that Microsoft's large-scale investments in AI will pay off, writes CNBC.

This article was AI-translated and verified by a human editor