Microsoft's cloud brings rain of revenue but modest M365 AI revenue harvest

Microsoft reported a robust $90 billion in revenue for the quarter ending June 30, a 18% increase that pushed its stock upwards by over 7% in post-market trading. The surge was largely driven by its cloud business and AI services. Microsoft Cloud's revenue rose 27% year-over-year to $59.3 billion, while Azure's revenue grew an impressive 43%. Additionally, Microsoft 365 Copilot saw a 50% increase in its paid user base from the previous quarter.

CEO Satya Nadella highlighted Microsoft's progress in advancing the "cost-to-outcome curve," stating that every customer can now "turn tokens into business results." He added that Azure revenue had surpassed the $100 billion mark for the first time and that Microsoft 365 Copilot had reached over 30 million paid seats. While 30 million of Microsoft 365's estimated 450 million commercial customers may not represent a massive endorsement of Copilot AI, it still constitutes a significant milestone, especially considering Microsoft's new usage-based billing model.

Operating income reached $40.6 billion, an 18% increase, and net income soared to $35.8 billion, a 31% jump, resulting in diluted earnings per share of $4.81, a 32% increase. Microsoft's investment in Anthropic contributed a gain of approximately $3.2 billion for the quarter. For 2026 fiscal year, revenue reached $331.8 billion, an 18% increase, with operating income at $155.2 billion, a 21% rise, net income at $133.7 billion, a 31% increase, and EPS of $17.95, a 32% increase.

These results seemed to alleviate concerns about Microsoft's aggressive capital spending, which amounted to $41 billion, a 70% increase from the previous year and 28% more than $31.9 billion reported in the previous quarter. CFO Amy Hood explained that about two-thirds of the company's capex took the form of short-lived assets like CPUs and GPUs. Finance leases accounted for about $5.6 billion of capex, according to Hood.

Microsoft claims to have a substantial number of potential customers waiting to use the datacenters it is currently constructing, with commercial remaining performance obligation growing 84% to $678 billion. CFO Hood mentioned that customer demand for cloud services exceeded available capacity. Despite the increased spending on property and equipment, Microsoft generated $55.44 billion in quarterly operating cash flow, a 30% year-over-year increase, suggesting that the AI buildout is not cannibalizing the core business.

While Microsoft enjoys strong revenue, there remains concern about potential unrequited AI spending, as evidenced by Meta's disappointing financial results. Fitch Ratings warned on Monday that the possibility of an AI market correction could pose a significant credit risk. The financial business highlighted the intertwined nature of capital markets and AI as a potential vulnerability for credit, should long-run returns potential be re-evaluated.