Microsoft Exceeds Earnings Expectations in the Last Quarter, but Capital Spending Slows Unexpectedly

Microsoft released its earnings report after the market closed on Wednesday for the third fiscal quarter of the 2026 fiscal year (referred to as the next quarter here), with revenue of $82.886 billion, a year-over-year increase of 18%, topping analyst expectations of $81.46 billion; non-GAAP diluted EPS was $4.27, a year-over-year increase of 23%, above the expected $4.07. The earnings report itself continued its strong growth, but the stock price fell more than 3% after the market closed and then turned slightly positive.

The main driver of growth still comes from cloud and AI. Commercial cloud revenue reached $54.5 billion, a year-over-year increase of 29%; Intelligent Cloud revenue was $34.681 billion, a year-over-year increase of 30%, with Azure and other cloud services revenue growth of 40%, slightly higher than the analysts' expected 38.2%.

The pace of AI revenue conversion is also accelerating. Microsoft CEO Satya Nadella said that Microsoft's AI business has an annualized revenue run rate of over $37 billion, a year-over-year increase of 123%, indicating that AI has begun to enter into cloud, Copilot, developer tools, and enterprise software revenue.

The commercial remaining performance obligations grew by 99% year-over-year to $627 billion, representing a significant increase in the scale of contracts signed but not yet recognized as revenue, providing visibility for future cloud and software revenue.