Microsoft beats estimates as Azure growth hits 40%

Core Insights - Microsoft is experiencing strong demand across its cloud services, particularly Azure, which is expected to grow approximately 37% in the upcoming quarter, indicating capacity constraints through at least the end of the fiscal year [1][2][7] - The company's cloud revenue surged around 26% to $49.1 billion, with Azure-related services growing about 40% year over year, driven by AI-related workloads [2][4][9] - Despite a significant increase in capital expenditures to roughly $35 billion, free cash flow rose 33% year over year to $25.7 billion, demonstrating the company's ability to scale profits alongside infrastructure investments [6][12] Financial Performance - Microsoft reported revenue of $77.7 billion for its fiscal first quarter of 2026, an 18% increase year over year, with adjusted EPS of $4.13, surpassing Wall Street's estimate of $3.67 [5] - Operating income rose 24% year over year to $38 billion, showcasing the company's profitability despite record spending [4] - Intelligent Cloud revenue jumped 28% to $30.9 billion, driven by Azure and a surge in AI-enabled workloads [9][10] Demand and Growth - Commercial bookings soared 112%, largely due to OpenAI's commitments to Azure, indicating strong future revenue potential [8] - Remaining performance obligations surged 51% to $392 billion, highlighting a significant backlog of future revenue [10] - The company is increasing its spending on GPUs and CPUs to meet accelerating demand, with expectations for FY26 growth rates to exceed those of FY25 [7][8] Challenges and Market Reactions - Shares slipped almost 4% in after-hours trading, reflecting high investor expectations and a desire for more than just cloud growth and capital expenditure promises [3][15] - An outage affecting Azure and other services occurred shortly before the earnings report, which may have impacted market perception [5][14] - Despite the challenges, the company is focused on building a substantial base for future growth, shifting the narrative from merely achieving growth to monetizing that growth effectively [15]