Microsoft shares rose 4% in extended trading on Wednesday after the software giant reported better-than-expected fiscal first-quarter results, fueled by strong growth in its Azure cloud business and continued demand for AI infrastructure.
Revenue for the quarter ended Sept. 30 climbed 19% year over year to $92.28 billion, beating analysts’ expectations of $90.69 billion, according to LSEG. Adjusted earnings per share came in at $4.89, above the consensus estimate of $4.73.
Net income rose to $36.63 billion, or $4.92 per share, from $27.75 billion, or $3.72 per share, a year earlier. Adjusted earnings exclude an approximately $200 million loss on Microsoft's investment in OpenAI.
Azure Growth Accelerates as Demand Outstrips Supply
Azure revenue grew 48% during the quarter. For the first time, Microsoft disclosed Azure revenue in dollar terms, reporting $33.17 billion for the period.
The company has been expanding its data center infrastructure to meet rising demand for AI computing, while selling access to AI models through Azure and integrating AI capabilities into workplace software. However, capacity constraints have continued to limit its ability to meet customer demand.
“We still have demand that exceeds supply,” Chief Financial Officer Amy Hood said on a conference call with analysts.
For the fiscal second quarter ending in December, Microsoft expects Azure revenue to grow 49% to 50% in constant currency, above the 45.1% growth forecast by StreetAccount. The company projected total revenue of $96 billion to $97.1 billion, exceeding analysts' estimate of $95.60 billion.
Microsoft also disclosed that revenue associated with its commercial arrangements with OpenAI totaled $10 billion during the quarter. The figure, which includes revenue-sharing payments received from its partner, accounted for roughly 11% of Microsoft's total sales, up from approximately 7% of revenue in the fiscal year ended in June.
AI Infrastructure Spending Rises, but Free Cash Flow Declines
Microsoft's strong cloud performance comes alongside a substantial increase in spending on AI infrastructure.
Capital expenditures rose 30% year over year to $45.2 billion in the fiscal first quarter. The figure was lower than expected, partly because some third-party cloud capacity deliveries were delayed, according to Jonathan Neilson, Microsoft's head of investor relations.
Around 75% of capital expenditures were allocated to short-lived assets, such as processors and graphics processing units, up from approximately 66% over the previous three quarters and 50% a year earlier. The shift suggests Microsoft is directing more spending toward computing equipment that can be deployed to support revenue-generating services.
Hood said capital expenditures and finance leases would exceed $50 billion in the fiscal second quarter, with spending likely to increase further in early 2027.
The spending surge is weighing on cash generation. Free cash flow fell 27% year over year to $18.63 billion in the first quarter, even as net income increased. Microsoft nevertheless expects to continue generating positive free cash flow through fiscal 2027. Hood added that the company would consider raising additional capital when market conditions make doing so attractive.
Copilot Adoption Grows as Traditional Businesses Face Pressure
Microsoft is working to turn AI adoption into a meaningful source of revenue through its productivity software.
Revenue from its Agents and Infra segment, which includes Azure and Microsoft 365, increased nearly 25% to $76.8 billion, exceeding StreetAccount's consensus estimate of $75.63 billion.
CEO Satya Nadella said the number of people using Microsoft 365 Copilot increased 50% from the previous quarter. Hood added that the premium Microsoft 365 E7 productivity bundle had reached millions of seats. Revenue from workplace products, including Office, totaled $27.8 billion, slightly above analysts' average estimate of $27.5 billion. Microsoft did not disclose an updated figure for paid Copilot seats.
Meanwhile, revenue from Microsoft's Devices and Consumer segment slipped 3% to $15.48 billion, although it beat analysts' expectations of $15.05 billion. The segment includes Windows licenses, hardware, Xbox, and search and advertising.
Revenue from devices and Windows licenses fell 22%, as higher memory and storage costs pushed up prices. Microsoft also cited weak PC demand and the end of Windows 10 support last year as factors affecting the business.
Microsoft Seeks Greater Efficiency as AI Costs Mount
Microsoft is also looking to control costs as it expands its AI infrastructure.
Earlier this week, the company announced voluntary buyouts for as many as 60,000 employees, representing roughly a quarter of its workforce. The move follows workforce reductions in recent years as Microsoft seeks to balance its substantial AI investments with operational efficiency.
Microsoft shares have gained approximately 10% year to date through Wednesday's close, trailing the S&P 500's 13% advance.
The results underscore the strength of Microsoft's cloud business and growing demand for AI computing. But with capital spending continuing to climb and free cash flow declining, investors will be watching whether Azure growth and wider Copilot adoption can generate sufficient returns to justify the company's expanding infrastructure commitments.