Microsoft beats earnings estimates, even as AI spending spree continues

Microsoft smashed Wall Street estimates on Wednesday, with all eyes on the balance between the company’s revenue growth and its heavy artificial intelligence spending, which showed no signs of slowing down.

The Redmond-based tech giant reported $92.3 billion in revenue, a 19% year-over-year increase, for the first quarter of its 2027 fiscal year, which ran from July through September, beating analysts’ consensus. Microsoft reported $36.6 billion in profit for the quarter. 

Though Microsoft routinely exceeds expectations on quarterly revenue and profit, those figures are not enough to keep investors satisfied amid the AI boom and as Microsoft’s spending — specifically its capital expenditures toward AI infrastructure like computer chips and data centers — increases each quarter. 

Microsoft posts record revenue — again
As Microsoft routinely beats core financial expectations but spends heavily on AI, investors have started to look deeper at cloud-computing revenue and free cash flow.

Source: Microsoft (The Seattle Times)

Many are also looking for more evidence a return on investment is coming for the company’s Azure cloud-computing platform.

After years of cloudy reporting around its Azure business, Microsoft finally began disclosing the division’s annual revenue at the end of the 2025 fiscal year, which was $75 billion at that time. That jumped to more than $100 billion during the most recent fiscal year, which ended on June 30. 

The company is now reporting quarterly revenue growth for the Azure division. For the most recent quarter, Microsoft reported $33 billion, reflecting 48% in year-over-year growth.

Microsoft’s capital expenditures rose again during the quarter to $45.2 billion, below previous expectations of roughly $50 billion. Microsoft Chief Financial Officer Amy Hood said during an earnings call with analysts on Wednesday that the lower figure was due to delays in bringing data centers online.

Next quarter, the company expects AI-related investments to pass $50 billion, according to Hood. She told analysts that the bulk of Microsoft’s capital spending is increasingly shifting toward short-lived assets — high-tech computer chips called CPUs and GPUs. Demand and costs for those chips are on the rise. During the most recent quarter, roughly 75% of Microsoft’s capital expenditures were devoted to short-lived assets.

Rising capital expenditures have been a focal point for analysts and investors as companies disclose financial reports every three months. Companies that overshoot prior predictions have been dinged by the market.

Even as Microsoft’s AI investments grow, the company has been able to lower the amount it expects to spend this year. Microsoft was on track to invest $190 billion in chips and data centers this calendar year, but reclassified some data center leases to operational costs. This allowed the company to downplay capital spending to $170 billion this year.

RBC Capital Markets analyst Rishi Jaluria wrote in an earnings preview that RBC believed the market was underappreciating Microsoft’s creative accounting. While the overall investment strategy remains the same, the move lets Microsoft stay more agile and flex spending up or down quickly in response to demand, Jaluria said.

As capital expenditures become a routine part of earnings season, free cash flow is grabbing a bigger spotlight for tech giants. Microsoft’s free cash flow dropped 27% year-over-year during the quarter to $18.63 billion, reflecting sustained spending from the company.

But Microsoft fared better than some of its rivals. Google parent Alphabet reported negative $9 billion in free cash flow on Wednesday for the quarter, causing the company’s stock to plummet 9% in extended trading. Meta suffered a similar fate last week when it reported negative $2.12 billion in free cash flow after a quarter of escalating capital expenditures. Meta’s stock is down 12% since it reported financial results on Oct. 21.

Hours after Alphabet reported negative free cash flow, Hood told analysts that “given our strong business performance,” Microsoft expects to remain free cash flow positive for the rest of its 2027 fiscal year, which ends next June. 

However, she didn’t squash the possibility of Microsoft raising capital for future investments.

“To complement cash generated by the business and preserve financial flexibility, we will access additional sources of funding when we believe it is attractive to do so,” Hood said.

Microsoft’s stock increased by as much as 5% in extended trading.

Microsoft Philanthropies underwrites some Seattle Times journalism projects.