Microsoft has shown that artificial intelligence is already generating real money for the company. In the quarter from July to September, it brought in more than $92 billion, up 19 percent from a year earlier. Growth therefore accelerated slightly compared with the previous quarter, when it stood at 18 percent. The main contributor was the Azure cloud service. But the results also showed just how much the company relies on a single customer, OpenAI, and how much it costs to build new data centers.
Azure is growing faster than Microsoft itself expected
Azure is a service through which companies rent computing power from Microsoft. Instead of building their own server facilities, they run their applications, databases and, increasingly, artificial intelligence models on machines in Microsoft’s data centers. Demand for this computing capacity is enormous because of AI.
Azure revenue rose 48 percent to around $33 billion, and Microsoft disclosed for the first time how much the service generates in dollar terms. Until now, it had reported only percentage growth. The company itself had expected growth of 44 to 45 percent, meaning it beat its own forecast for at least the fifth consecutive time. For the next quarter, it is even projecting 49 to 50 percent.
Microsoft’s entire cloud business, which includes services such as the Microsoft 365 office suite subscription alongside Azure, performed similarly well. It generated nearly $64 billion, 30 percent more than last year, while the value of signed contracts that the company has yet to fulfill jumped 73 percent to $677 billion.
Microsoft also makes money from AI directly through its applications. Copilot is an assistant built into Word, Excel and Outlook that can summarize a long email, prepare a presentation or review a spreadsheet. The number of customers with more than 50,000 Copilot licenses increased eightfold over the year, while the number of daily users rose by nearly half during the quarter and fivefold over the year.
OpenAI pays Microsoft more than Xbox and Windows combined
However, Azure’s acceleration is largely driven by OpenAI, which rents servers from Microsoft to train and operate its models. Growing cloud revenue offset a slight decline in Xbox and devices.
In a filing with the U.S. Securities and Exchange Commission, Microsoft disclosed for the first time how much it received from OpenAI in a single quarter. The figure was $10 billion, or roughly 11 percent of all revenue, which is more than Xbox, advertising-supported search, or Windows licenses together with Surface computers generated over the same period. The amount includes server rentals as well as the share of its revenue that OpenAI pays to Microsoft. For the entire previous fiscal year, which ended in June, the figure was $24.1 billion, averaging about $6 billion per quarter. If the current pace continues, Microsoft will receive around $40 billion annually.
Microsoft owns about a quarter of OpenAI and is therefore required under accounting rules to disclose transactions between the two companies. Under an agreement reached in April, OpenAI will pay Microsoft a share of its revenue until 2030, albeit subject to a cap, while being permitted to rent computing capacity from competing cloud providers as well. But the amount OpenAI owes Microsoft is also growing. At the end of September, it stood at around $7 billion, a billion more than three months earlier.
Microsoft CEO Satya Nadella did not comment on the 11 percent share during a call with analysts. He praised OpenAI’s latest models and noted that customers are increasingly combining models from different companies or training their own. He also added that, in his view, reporting a few quarters of growth thanks to several customers buying up vast amounts of computing capacity does not constitute a real business.
Data centers are consuming tens of billions
To ensure that Microsoft has capacity to rent out, it must keep building. Capital expenditures, meaning money spent on new data centers, servers, chips and long-term building leases, reached $45.2 billion, roughly 30 percent more than a year earlier but less than analysts had expected. Microsoft itself had projected $50 billion. It paid more than $39 billion in cash for equipment and construction alone, more than double last year’s amount.
The lower figure does not mean the company is slowing down. Head of investor relations Jonathan Neilson explained that the delivery of some data centers being built for Microsoft by other companies had been delayed, and expenditures would therefore rise again in the coming quarters. Chief Financial Officer Amy Hood expects more than $50 billion in the period from October to December and around $170 billion for the full 2027 calendar year.
What Microsoft spends its money on is also changing. The share devoted to equipment with a short useful life, mainly processors and graphics chips, has risen from roughly two-thirds to three-quarters. AI chips become obsolete much faster than the buildings themselves, so the company will have to replace them frequently.
Accounting also affects the level of expenditures. Microsoft rents significantly more capacity from other companies, such as CoreWeave, than Amazon or Google do. Starting this fiscal year, it extended the estimated useful life of data centers from 15 to 25 years and will classify more leases as ordinary rent, which is not included in capital expenditures. As a result, construction spending looks somewhat more modest on paper, but rental payments will appear elsewhere.
That is precisely why the market is now primarily watching free cash flow. This is the money left over after a company pays for operations and investments, and it can be used, for example, to pay dividends or repay debt. Microsoft had $18.6 billion left for the quarter, compared with $25.7 billion in the same period last year. Cash and short-term investments fell from $76.8 billion to $64.5 billion over three months. Nevertheless, Amy Hood assured investors that the company would remain cash-flow positive in the current fiscal year, which ends in June 2027.
The stock market initially reacted enthusiastically to the results. Operating profit rose 21 percent to nearly $46 billion, and the shares gained almost 6 percent in after-hours trading following the release of the figures. According to estimates, Microsoft’s market value thus reached around $4 trillion, surpassing Alphabet. By Thursday morning, however, the shares were trading at just under $529, down 0.4 percent from Wednesday’s close.
On the same day, it emerged that Microsoft intends to borrow money. The company, which is one of only two U.S. corporations with the highest possible credit rating, plans to sell $25 billion in bonds, its first such issuance since 2017.
Sources: ft.com, wsj.com and reuters.com
