Microsoft’s cloud development accelerates, and so too does the spending

The software giant’s first-quarter earnings report Wednesday showed ample demand for its AI services, as Microsoft races to put more computing capacity online and as other parts of its business, such as legacy software and gaming, lag.

The Redmond, Wash.-based company said first-quarter revenue totaled $92.3 billion, up 19% year-over-year and above what Wall Street analysts expected. Its profit was $36.6 billion, also edging out analyst predictions.

Its Azure cloud business grew by 48%, ahead of analyst estimates and a welcome sign for investors. The company’s shares were trading up around 2.5% in after-hours trading.

Microsoft investors have been eager to see Azure continue to grow at a high clip and for the company to prove that its AI bets, such as its Copilot assistant, are generating solid revenue. Both are important metrics because they show whether Microsoft, and the AI industry in general, is sustaining demand, especially as tech giants spend gobs of cash on building data centers.

On Wednesday, Microsoft Chief Financial Officer Amy Hood said in a call with analysts that calendar-year spending on capital expenditures would reach about $170 billion, with the company expecting CapEx to exceed $50 billion during the current quarter. Microsoft said that its first-quarter CapEx reached $45.2 billion, higher than the previous quarter but less than what analysts predicted. Hood said the figure reflected some delays the company had seen in expected third-party capacity deliveries.

“We still have demand that exceeds supply,” Hood said.

Hood also said total revenue is expected to be between $96.0 billion and $97.1 billion during the current quarter, above what analysts expected. Operating margins are expected to be down slightly year-over-year.

Microsoft is one of several so-called hyperscalers spending big to meet AI compute demands, with Amazon, Microsoft, Google parent Alphabet, and Meta Platforms collectively expected to devote more than $700 billion to capital expenditures in 2026, mostly for data centers.

Microsoft’s Wednesday earnings comes in the middle of a run of major tech earnings reports. Meta said last week that its capital expenditures this year would surge to as much as $145 billion, and that the cash it had on hand had turned negative, sending its shares down. Alphabet on Wednesday reported gains in its cloud division but a weaker performance in advertising, and Amazon is scheduled to post on Thursday.

Hood said that she expects Microsoft to remain free cash flow positive during its 2027 fiscal year.

Microsoft didn’t provide an update on Copilot sales specifically, but Chief Executive Satya Nadella said the number of Copilot customers actively consuming credits through usage-based billing grew more than 75% during the quarter. In its previous quarterly report, Microsoft said Copilot had 30 million paid users, up from 20 million the quarter before.

Investors have been anxious about the Copilot business after it had a slow start. Microsoft, for its part, has reimagined Copilot, recently turning the service into a “super app” that will span coding, chat, and autonomous functions. It also this month unveiled new features for its Windows operating system that let users work with AI agents, along with a plan to integrate seamlessly with Copilot.

Microsoft has benefited from the AI boom primarily because of its cloud computing service, which helps AI companies train their models and make them available through Azure, but the company has also strained to get computing capacity online and to balance the needs of its partners with those of its own proprietary AI models.

Earlier this week, AI company Anthropic released the prospectus for its upcoming initial public offering, which provided insight into just how much Microsoft and other hyperscalers are benefiting from the AI lab’s needs. Anthropic has committed to spending at least $44.9 billion on Microsoft compute between this November and May 2033, regardless of actual usage. That is part of Anthropic’s commitment of at least $389.9 billion for compute spending to companies including Amazon, Alphabet, and SpaceXAI.

Microsoft’s Wednesday report arrives during a time of great change at the 51-year-old company. This week, it offered buyouts to roughly 60,000 employees, or about 27% of its workforce, as it continues a company-wide pivot into AI that has pressured it to cut costs. Eligible employees must accept by the first week of December, though Microsoft expects fewer than 10% of employees will take the offer.

In July, Microsoft cut about 4,800 jobs, following more than 15,000 layoffs in 2025. Many of the recent cuts have been centered in its struggling Xbox unit, which has dragged on overall financial performance.

On Wednesday, Microsoft said Xbox content and services revenue decreased by 2%, partially offset by growth in first-party content, while its hardware revenue fell by 14%. Microsoft’s Windows OEM and Devices revenue decreased by 22%, weighing down its overall Devices and Consumer segment.

For the current quarter, the company projects Xbox content revenue to grow in the mid-to-high single digits, driven by launches of first- and third-party content. (The company last week released Call of Duty: Modern Warfare 4.) It still expects Xbox hardware revenue to decrease.