Microsoft (NASDAQ:MSFT) shares climbed roughly 3% in extended trading on Wednesday, after the company reported fiscal fourth-quarter results that showed stronger-than-expected growth in its Azure cloud business and capital expenditures that came in slightly below elevated forecasts.
The performance helped ease a key concern that had weighed on the stock this year. Microsoft invested $41 billion in capital projects during the quarter, more than 70% above the prior-year period but below the $42.37 billion analysts had predicted. The shares had fallen about 18% year-to-date heading into the report, as investors sought evidence that demand for artificial intelligence services was catching up with the infrastructure buildout.
Cloud Growth Leads the Way
Azure revenue expanded 43%, outpacing the Visible Alpha consensus estimate of 39.98%. Total revenue reached $90.0 billion, compared with the $87.7 billion Street forecast, representing a 2.6% upside. Diluted earnings per share, excluding the impact of the company's investment in OpenAI, came in at $4.74, well above the $4.24 consensus.
"Azure revenue surpassed $100 billion for the first time," Chief Executive Satya Nadella said in a statement. Total Microsoft Cloud revenue rose 27% to $59.3 billion.
Cash Flow Under Pressure
The first read on the numbers was largely favorable, with faster cloud growth and lower-than-feared spending. However, the cash-flow picture was notably weaker. Operating cash flow rose 30% to $55.4 billion, but cash additions to property and equipment more than doubled to $35.8 billion. As a result, free cash flow fell 23% to $19.6 billion, down from $25.6 billion a year earlier.
The income statement held up better. Operating margin edged higher to 45.1% from 44.9% a year ago, despite the infrastructure surge. That split matters: capital spending drains cash immediately, while depreciation reaches earnings over time.
Demand Signals Remain Robust
Demand indicators remained strong. Commercial cloud backlog rose by $51 billion sequentially to $678 billion, an 8.1% increase. Reuters reported that all sequential backlog gains came from customers outside leading U.S. AI model makers, broadening demand beyond a few large AI laboratories.
Copilot adoption also accelerated. Paid Microsoft 365 Copilot seats exceeded 30 million, up from 20 million in the previous quarter and ahead of the 26.9 million analysts had expected.
Mixed Portfolio Performance
The rest of Microsoft's portfolio delivered mixed results. Intelligent Cloud revenue jumped 32%, while the More Personal Computing segment fell 4%. Windows and devices dropped 7%, and Xbox content and services declined 10%.
On a GAAP basis, earnings reached $4.81 per share. A $3.2 billion gain from the company's investment in Anthropic added 33 cents. Microsoft said several discrete items produced a net 27-cent benefit.
Outlook and Risks
Looking ahead, Microsoft expects capacity constraints to persist through at least the end of fiscal 2026. Continued cash-flow pressure could revive doubts about the returns on AI investments as depreciation rises. The company had not issued fiscal 2027 guidance by the time regular trading closed at 17:01 EDT. Its analyst call was scheduled for 17:30 EDT, with capital expenditure and Azure guidance seen as the next major test for the stock.
