Microsoft (MSFT.US) breaks the “AI Money Burning Panic”! Q4 performance exceeded expectations across the board: cloud business growth guidelines accelerated, and this year's capital expenditure forecast was revised downgraded

The Zhitong Finance App learned that after doubts about the return on AI investment loomed over Wall Street for several weeks, Microsoft (MSFT.US) gave the strongest response with a quarterly report that completely exceeded expectations — not only did revenue and profit both crush expectations, Azure's growth rate hit the fastest in four years, but more importantly, the company took the initiative to lower its capital expenditure forecast for the 2027 fiscal year from 190 billion US dollars to 175 billion US dollars, easing the market's fear that “AI burns no money.” After the financial report was released, Microsoft's stock price surged more than 8% after the market to 423.04 US dollars.

Core financial data: completely crushed expectations, net profit surged 31%

Throughout the 2026 fiscal year, Microsoft's total revenue reached US$331.8 billion, up 18% year on year; net profit was US$133.7 billion, up 31% year on year. Azure's annual revenue surpassed the $100 billion mark for the first time, making it the second cloud service provider to reach this milestone after Amazon AWS. Microsoft achieved revenue of US$90.1 billion in the fourth fiscal quarter, an increase of 18% over the previous year, far exceeding analysts' expectations of US$87.7 billion.

Among them, non-GAAP earnings of $4.74 per share excluded the impact on OpenAI investment, which was 11.5% higher than market expectations of $4.24. GAAP net profit surged 31% year over year to US$35.77 billion.

Anthropic investments contribute windfall gains. This quarter's results include an investment income of $3.2 billion — an increase in Microsoft's equity investment in AI lab Anthropic. Furthermore, the costs associated with the voluntary retirement plan implemented by the company for the first time were lower than expected, further boosting profits.

Performance guidance: Q1 outlook exceeds expectations

For the first quarter of fiscal year 2027 (July to September 2026), Microsoft expects:

Total revenue: US$89.85 billion to US$90.95 billion, with a median value of US$90.4 billion, higher than analysts' expectations of US$89.66 billion;

Azure growth: about 45% at a fixed exchange rate, far exceeding analysts' expectations of 41.4%;

Productivity and business processes: 36 billion to 37 billion US dollars, an increase of 11%-12% over the previous year;

Intelligent cloud: 36.7 billion to 37 billion US dollars, a year-on-year increase of 33%-34%;

More personal calculations: $12.2 billion to $12.7 billion;

The company also said that despite strong Q4 performance in FY2026, growth is expected to accelerate further in the first half of FY2027.

Azure cloud business: 43% growth rate is the fastest in four years, with annual revenue breaking 100 billion for the first time

The Azure cloud business, which has received the most attention in the market, handed over an amazing questionnaire. Revenue from Azure and other cloud services increased 43% year over year (at a fixed exchange rate) in the fourth fiscal quarter, which was not only higher than 40% in the previous quarter, but also far exceeding analysts' expectations of 39.6% to 40%. This is Azure's fastest quarterly growth rate since early 2022. Microsoft CFO Amy Hood expects Azure's fixed exchange rate growth to accelerate further to 45% in the next quarter, higher than market expectations of 40.9%.

Microsoft's overall cloud business revenue (including Azure, Office 365 cloud editions, etc.) reached US$59.3 billion, an increase of 27% over the previous year.

CEO Satya Nadella said in a statement: “This year, Azure's revenue surpassed $100 billion for the first time, and Microsoft 365 Copilot has more than 30 million paid user seats, which reflects our customers' confidence in driving their AI transformation.”

The overall revenue of the Intelligent Cloud Division (including Azure, server products and enterprise services) was US$39.31 billion, up 32% year over year, and also exceeded market expectations of US$38.17 billion.

Microsoft also revealed that by the end of the quarter, the backlog of cloud business contract orders reached 678 billion US dollars, up from 627 billion US dollars in the previous quarter, and increased future sales of about 50 billion US dollars over the previous quarter. The company specifically emphasized that these new commitments mainly come from enterprise customers other than leading AI model makers in the US, indicating that AI demand is spreading to a wider range of economic sectors.

Azure's annual revenue surpassed $100 billion for the first time, an increase of 41% over the previous year, making it another “100 billion” business pillar of Microsoft after Office and Windows.

AI commercialization accelerates: Copilot surpasses 30 million paid users

The commercialization process of Microsoft's AI products is speeding up. Microsoft 365 CoPilot — an add-on product sold as an AI assistant to Office software — has reached over 30 million paid user seats, up from about 20 million three months ago. Analysts' previous average forecast was 26.9 million. Over 300,000 corporate customers have purchased Copilot services, and over 90% of Fortune 500 companies are using some form of Copilot.

CEO Nadella revealed during the earnings call that hundreds of corporate customers have purchased tens of thousands of high-end E7 productivity software packages. GitHub Copilot Programming Assistant has reached 50 million users. Microsoft accelerated Copilot's enterprise-level deployment through Accenture and other channel partners, reaching 740,000 seats in a single deal.

However, the penetration of Microsoft's AI business is also facing structural challenges. Deutsche Bank pointed out last week that there is a “certain concentration risk” in the relationship between Microsoft and OpenAI, especially in the context of the rise of the open source model. Microsoft revealed in January that about 45% of its $625 billion commercial non-performance obligations were related to OpenAI.

The Microsoft report followed Google's (GOOGL.O) report, and Google's cloud business ushered in explosive growth. The cloud revenue announced last week surged 82%, far exceeding market expectations. Dave Wagner, portfolio manager at Aptus Capital Advisors, said: “Google seems to be stealing market share from everyone, and if they continue this growth momentum, they can catch up with Azure's market share. But what Azure has shown us is that it has always been competitive.”

Performance of other business segments: Software resilience exceeds expectations

The Productivity and Business Process Division (including Office, Dynamics, and LinkedIn) had revenue of US$37.85 billion, up 14.3% year over year, exceeding market expectations of US$37.19 billion. Among them, Microsoft 365 commercial cloud revenue increased 16%.

More personal computing divisions (including Windows, Xbox, Surface, and Bing) had revenue of US$12.85 billion, down 4.4% year on year, but still higher than expectations of US$12.17 billion. Equipment sales and authorized Windows shipments fell 7%, in line with the 4.2% decline in PC shipments according to the research institute Gartner statistics. Xbox's business revenue fell 10%, and the division's CEO announced layoffs and the divestment of four studios at the beginning of this month.

Capital expenditure: from “source of fear” to “biggest surprise”

This is the real turning point of this financial report. Capital expenditure (including financial leases) for the fourth fiscal quarter was 41 billion US dollars, up more than 70% year on year, slightly lower than market expectations of 42.37 billion US dollars. The company's capital expenditure for the previous three months was $31.9 billion. In terms of free cash flow, the quarter was $19.64 billion, down 23% year over year. However, Hood expects the 2027 fiscal year to return to positive values.

This reduction was mainly achieved through accounting adjustments: Microsoft extended the useful life of assets such as data centers and office buildings from 15 to 25 years, while also shifting more future data center leases from financial leases to operating leases. The CFO emphasized that the company's actual investment plan “remains unchanged” and that the adjustments only affect the caliber of the report.

Capital expenditure was the most anxious variable in the market before this financial report. Microsoft previously anticipated capital expenditure for the 2026 calendar year to reach 190 billion US dollars. Against the backdrop of Alphabet's stock price falling sharply due to an increase in spending guidelines, investors are highly nervous about whether Microsoft will further “increase” it. Microsoft has taken the initiative to lower spending expectations while promising positive free cash flow, sending a clear signal to investors: AI investment continues, but the company is capable of completing this transformation without sacrificing financial health.

But what excites the market even more is the guidance for the future. Microsoft emphasized that the actual investment plan has not changed, but adjustments in accounting processing have reduced the reported capital expenditure figures. Hood expects capital expenditure for the first quarter of fiscal year 2027 to be around $50 billion, below market expectations of $56 billion. During the earnings call, Microsoft lowered its capital expenditure forecast for the calendar year 2026 from the previous 190 billion US dollars to 175 billion US dollars.

Microsoft revealed that the amount of the data center lease contract that has not yet entered into effect amounts to US$329.1 billion, and the lease period ranges from fiscal year 2027 to fiscal year 2033. Jonathan Nielsen, vice president of investor relations at Microsoft, said: “These contracts will last for many, many years... This shows once again that the demand signals we are seeing are always critical.” This means that Microsoft's AI infrastructure expansion is far from over; it's just that the pace of spending and the way accounting is presented has changed.

A critical battle to determine the fate of the $700 billion AI investment

The reason why Microsoft's earnings report has triggered such a strong market reaction is because it has become a “weather vane” for the global AI industry chain. Microsoft's capital expenditure decisions directly affect orders from Nvidia GPUs, AMD CPUs, Broadcom and Marvell networking equipment, high-bandwidth memory from SK Hynix and Micron, advanced packaging from TSMC, and semiconductor equipment vendors such as ASML and applied materials.

Moody's predicts that the capital expenditure of the six hyperscale cloud service providers will reach $785 billion in 2026, rising further to about $1 trillion in 2027. Goldman Sachs predicts related spending will be close to $1.2 trillion in 2027. The core message conveyed by Microsoft's earnings report is that the AI investment cycle is not only not slowing down, but it is also accelerating — but huge capital expenses are being “softly managed” through accounting methods to ease market anxiety about cash flow.

Prior to the release of the earnings report, Microsoft's stock price had already fallen by about 19% during the year, making it one of the worst performing members of the “Big Seven.” Although the company previously exceeded EPS expectations for four consecutive quarters, the stock price fell after the release of three earnings reports. This time, things were quite different. After the earnings report was released, Microsoft's stock price surged more than 8% after the market. As of press release, the after-hours trading price ranged from around $398 to $423.

Seeking Alpha analyst Julia Ostian notes, “Microsoft's cloud and AI growth is certainly rapid and impressive, but it's important to remember that a significant portion of it relies heavily on huge ecosystem investments, which will seriously drag down operational profitability over the next 3-5 years.”

The value of Microsoft's earnings report goes far beyond the three words “beyond expectations.” After weeks of a collective collapse in AI chip stocks and growing market anxiety about the return on hyperscale capital expenditure, Microsoft's solid performance gave the strongest answer: AI demand exists and is still accelerating, and the company has the ability to find a balance between huge investment and financial health.

Investing Group leader Julian Lin said, “Microsoft faced concerns about the persistence of the software business and the obvious poor performance of Azure when entering financial reports. The company responded to these concerns with execution, with the highlights being resilient software growth and the unexpected acceleration of Azure growth.”