The company reported a 33% revenue increase in its Azure cloud division for the quarter ending March 31st, significantly surpassing analysts' estimates of 29.7%, according to data from Visible Alpha. Notably, artificial intelligence contributed 16 percentage points to this growth, an increase from the 13 percentage points reported in the previous quarter, highlighting the continued momentum of AI-powered services within Azure.
Looking ahead, Microsoft projected its cloud-computing revenue to grow between 34% and 35% on a constant currency basis for the fiscal fourth quarter, translating to a revenue range of $28.75 billion to $29.05 billion. This forecast handily exceeded analyst expectations, further bolstering investor confidence in the sustained growth of Microsoft's cloud business.
Adding to the positive momentum, Microsoft's commercial bookings growth, which reflects new infrastructure and software contracts with business clients, rose by a strong 18% in the fiscal third quarter. This growth was partly attributed to a new Azure contract with OpenAI, the creator of ChatGPT, although Microsoft refrained from disclosing the specific size or contribution of this deal to overall Azure sales growth.
Interestingly, while AI continues to be a significant growth driver, Microsoft's Chief Financial Officer, Amy Hood, clarified during an investor conference call that the "real outperformance in Azure this quarter was in our non-AI business." She attributed the upside in the AI sector to the company's ability to deliver supply ahead of schedule to several customers, suggesting a broader strength across Azure's service offerings.
These strong Azure results come at a time when some Wall Street analysts had lowered their expectations, partly influenced by reports of Microsoft ending certain data center lease obligations. However, CEO Satya Nadella addressed these concerns during the conference call, stating that Microsoft has a long-standing practice of dynamically adjusting its data center plans, a process that has only recently come under closer scrutiny by analysts.
Dan Morgan, a senior portfolio manager at Synovus Trust, commented on the results, noting that "the numbers were skeptical going in, giving them the room to beat pretty heavy. The beat wouldn’t have been this big if we didn’t have all these problems," implicitly referencing the prevailing uncertainty surrounding tariffs and their potential impact on tech spending. Microsoft's strong performance appears to have defied these concerns, at least for the time being.
For the reported quarter, Microsoft achieved a profit of $3.46 per share, exceeding the consensus estimate of $3.22 per share. Overall revenue climbed by 13% to $70.1 billion, with the Intelligent Cloud unit, which encompasses Azure, contributing a substantial $26.8 billion.
Notably, Microsoft's capital expenditures saw a significant jump of 53% to $21.4 billion in the third quarter. However, the proportion of spending on longer-lived assets decreased to approximately half of the total. CFO Amy Hood informed investors that while capital expenditures will continue to grow in fiscal year 2026, the growth rate is expected to moderate, with a greater emphasis on shorter-lived assets such as chips.
Jonathan Neilson, Microsoft's vice president of investor relations, explained this shift, indicating a move away from investments in data center buildings towards components like CPUs and GPUs. He noted that these shorter-lived assets enable the company to more quickly "start recognizing revenue." This strategic shift underscores Microsoft's ongoing commitment to building out its AI infrastructure and expanding its data center capacity to meet the burgeoning demand for its AI services.
Microsoft has consistently emphasized that it is currently capacity-constrained in the AI domain, necessitating significant investments in infrastructure. A potential slowdown in AI spending by major tech players like Microsoft would have far-reaching implications for suppliers such as chip giant Nvidia and the broader U.S. economy. J.P. Morgan analysts had previously estimated that data center spending could contribute significantly to U.S. economic growth in the coming years. Microsoft's strong results and optimistic outlook appear to assuage concerns of an imminent pullback, signaling continued investment in this critical sector.