Microsoft held its fiscal year 2026 third-quarter earnings call on April 29, Eastern Time. CEO Satya Nadella and CFO Amy Hood were present and delivered remarks.
Nadella began the call by stating, "This was a record third quarter." He reported that Microsoft Cloud revenue exceeded $54.5 billion, a 29% year-over-year increase. The annualized revenue run rate for the AI business surpassed $37 billion, growing 123% compared to the prior year.
Nadella characterized the current moment as a pivotal point in technology history: "We are at the beginning of one of the most important platform shifts, where agents will become the dominant workload and reshape how value is created across the economy." Following the call, Microsoft's stock saw a slight after-hours increase of 0.3%.
**Hardware Price Increases and GPU Shortages: Full-Year Capex of $190 Billion, $25 Billion from Higher Prices** This was the most closely watched new information from the call. Hood disclosed that capital expenditures for the fourth quarter are expected to exceed $40 billion, a significant sequential increase, with approximately $5 billion attributable to higher component prices. Capital expenditures for the quarter were $31.9 billion, with about two-thirds allocated to short-lived assets, primarily GPUs and CPUs. For the full 2026 calendar year, Microsoft anticipates capital expenditures of approximately $190 billion, with around $25 billion resulting from the impact of higher component pricing. Hood acknowledged that supply constraints are expected to persist throughout the year despite accelerated delivery efforts: "Even with these additional investments and our efforts to accelerate the deployment of GPUs, CPUs, and storage, we anticipate being supply-constrained through at least the full year of 2026." She further added, "Demand is broad and continues to grow, continuing to outpace supply." Nevertheless, Hood expressed optimism about returns: "We are confident in the returns on these investments, based on stronger demand signals, increasing product usage, and the efficiency gains we are already driving across our platform."
**Profitability: AI Business Outperforming Cloud Transition Period** Addressing concerns about whether high AI investments are squeezing profits, Hood offered a judgment that exceeded market expectations: "The profitability of our AI business is actually better than when we look back at the cloud transition period. This may be an area the market had somewhat underestimated." She attributed this resilience to several factors: consumption and usage-based pricing models better capture AI value; royalty-free IP usage rights from the OpenAI partnership; cost optimizations from custom chips (Maia 200, Cobalt); and ongoing hardware and software efficiency improvements. Management expects the full fiscal year operating margin to increase by approximately 1 percentage point year-over-year—a result achieved while continuing significant AI infrastructure investments and including a one-time charge of approximately $900 million related to a voluntary retirement program.
**Copilot Acceleration: Seats Exceed 20 Million, Growth Rate 250%** Nadella revealed that paid seats for M365 Copilot have surpassed 20 million, with net new seat additions growing 250% year-over-year this quarter, marking the "fastest growth rate since product launch." Expansion among large enterprise clients is also significant: Accenture now has over 740,000 seats, making it the largest single customer to date. Bayer, Johnson & Johnson, Mercedes-Benz, and Roche have each committed to purchasing 90,000 seats or more. Nadella used a clear comparison to describe usage intensity: "The depth of weekly user interactions is now on par with Outlook—more and more users are making Copilot a daily habit." He also mentioned that Copilot queries per user increased nearly 20% sequentially, and monthly active usage of first-party AI Agents has grown six-fold since the start of the year.
**Business Model Transition: From "Per Seat" to "Seat + Consumption"** Regarding the business model, both Nadella and Hood clearly indicated a shift in pricing logic from purely "per seat" to "seat plus consumption." Nadella stated, "Any of our per-user businesses—whether productivity, programming, or security—will transition to a per-user plus per-consumption model. That is the most accurate way to think about it." This quarter, Microsoft announced GitHub Copilot's transition to a consumption and value-based pricing model, effective June 1. He also addressed the core question of who ultimately pays for these AI expenditures: "Ultimately, the money will come from a business's evaluation and outcomes—the real value created by agents working on behalf of or alongside users. Whether it's customer service, personal productivity, team collaboration, or a business process—a cost is being reduced, or revenue is being increased. That is what drives consumption."
**Azure Growth: Q4 Guidance of 39%-40%, Moderate Acceleration Expected in Second Half** Azure revenue growth reached 40% this quarter (39% in constant currency), exceeding prior expectations. Hood explained this was primarily due to "earlier capacity delivery in the quarter, which boosted consumption for both AI and non-AI services." For the next quarter (Q4), Microsoft guided for Azure growth of 39% to 40% (constant currency), essentially flat with the current quarter. The longer-term outlook is more noteworthy: Hood stated that despite ongoing supply constraints, "we expect Azure growth in the second half of calendar 2026 to show moderate acceleration compared to the first half."
**Commercial Bookings: Up 7% Excluding OpenAI, RPO Exceeds $627 Billion** Hood disclosed that commercial bookings grew 7% excluding the impact of OpenAI; including OpenAI, they decreased 4% to 6% year-over-year. The remaining performance obligation (RPO) increased to $627 billion. Including OpenAI's RPO, it grew 99% year-over-year, with a weighted average contract term of approximately 2.5 years. The portion expected to be recognized as revenue within the next 12 months grew 39%, while the portion beyond 12 months grew 138%. Hood explained the logic behind the near-term pressure on booking numbers: "As we transition from our historical per-seat business to a seat-plus-consumption model, the form of the booking itself will change. It won't all flow through the traditional booking logic; some will be billed directly based on usage."
**OpenAI Agreement Restructured: Royalty-Free IP, Revenue Sharing Extended to 2030** During the call, Microsoft publicly addressed the revised agreement with OpenAI for the first time. Nadella stated, "Overall, we are pleased with our partnership with OpenAI. We have access to a frontier model, royalty-free, with full IP rights, usable up to the 32nd generation, and we fully intend to leverage that." Hood added two key financial points: First, the revenue-sharing arrangement will continue until 2030, providing valuable predictability. Second, Microsoft's royalty payments to OpenAI have been eliminated—IP is now accessed royalty-free, and the revenue share payment to OpenAI has been discontinued.
**Next Fiscal Year Outlook: Double-Digit Growth in Revenue and Operating Profit, Headcount to Decline Further** Hood provided clear guidance for the next fiscal year (FY27): Revenue and operating profit are both expected to achieve double-digit growth. Operating expense growth is expected to remain in the mid-to-high single digits, while the company's headcount will decrease year-over-year. She emphasized that this reflects the company's ongoing focus on improving operational efficiency to operate with greater speed and agility.
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