Microsoft’s cloud growth 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 initially trading up more than 4% 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 if Microsoft, and the AI industry in general, is sustaining demand, especially as tech giants spend gobs of cash on building data centers.

In its previous quarterly report, Microsoft said it expected its calendar 2026 capital expenditures to be roughly $175 billion. The company said Wednesday that its quarterly capital expenditures were $45.2 billion, higher than the previous quarter but less than what analysts predicted. 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 report 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. Alphabet on Wednesday reported gains in its cloud division but a weaker performance in advertising, and Amazon is scheduled to post on Thursday.

Microsoft didn’t initially provide an update on Copilot sales specifically but said its 5% growth in its Microsoft 365 commercial seats reflected sales of Copilot. 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 this year, turning the service into a “super app” that will span coding, chat, and autonomous functions. It also recently 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 AI labs’ 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%, 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.