Microsoft Corporation (MSFT) reported fiscal third-quarter results that topped Wall Street expectations, driven by a 40% surge in Azure cloud revenue and an artificial intelligence business now generating revenue at an annualized rate of $37 billion. Despite the strong numbers, shares slipped more than 2% in after-hours trading as investors focused on the company's rising capital expenditures and declining free cash flow.
For the quarter ended March 31, 2026, Microsoft posted revenue of $82.9 billion, up 18% year over year, and net income of $31.8 billion, a 23% increase. Diluted earnings per share came in at $4.27, surpassing the FactSet consensus estimate of $4.05, while revenue also beat the expected $81.4 billion.
The standout performer was Azure, whose revenue jumped 40%, accelerating from previous quarters. Microsoft's AI business has now reached a $37 billion annual run rate, up 123% from a year ago. CEO Satya Nadella emphasized that cloud and AI infrastructure remain the company's top priority, noting that AI is already converting into significant top-line results. CFO Amy Hood added that revenue, operating income, and EPS all exceeded forecasts due to strong demand across Microsoft Cloud.
Microsoft Cloud revenue rose 29% to $54.5 billion. The company's commercial remaining performance obligation—a metric reflecting future revenue from signed contracts—nearly doubled, surging 99% to $627 billion, indicating a massive pipeline of committed business.
Segment performance was mixed. Productivity and Business Processes, which includes Microsoft 365 and LinkedIn, generated $35.0 billion in revenue, up 17%. Intelligent Cloud contributed $34.7 billion, a 30% increase. However, More Personal Computing slipped 1% to $13.2 billion, weighed down by declines in Windows OEM, devices, and Xbox content and services.
Investor caution centered on the cost of expansion. Capital expenditure climbed 49% to $31.9 billion, though that was slightly below the $34.9 billion analysts had expected, according to Reuters. Free cash flow fell to $15.8 billion from $20.3 billion a year earlier, raising questions about the pace of return on massive AI infrastructure investments.
The spending battle is not unique to Microsoft. Alphabet (GOOGL) and Amazon (AMZN), both pursuing AI cloud opportunities, also reported robust cloud demand recently, intensifying competition. Reuters noted that the three major cloud providers are expected to spend over $600 billion combined on AI infrastructure this year.
Meanwhile, the Microsoft-OpenAI relationship is evolving. Under revised terms, Microsoft retains its 20% share of OpenAI revenue until 2030 but loses exclusive resale rights for OpenAI products on its cloud platform. This change comes as Amazon and Alphabet ramp up their own AI services.
Analysts offered mixed reactions. Wedbush's Daniel Ives maintained that Microsoft is still leading in AI, dismissing what he called an overreaction to Azure's performance. Evercore ISI's Kirk Materne described the quarter as a "survive and advance" period, suggesting the true trajectory of Azure growth will become clearer with the June-quarter forecast.
Microsoft plans to provide forward guidance during its earnings call later today. That update will likely determine whether investors view this report as confirmation of the company's AI strategy or as another instance of solid revenue growth offset by escalating costs.
