Microsoft announced that its Azure cloud business surpassed $100 billion in annual revenue for the first time in its recently completed fiscal year, delivering a bright spot for investors amid a broader market downturn driven by concerns over AI spending and U.S. inflation.

Azure, the centerpiece of Microsoft's cloud operations, reached the milestone with 41% growth over the prior year's $75 billion, CEO Satya Nadella said. The achievement reinforces Azure's position as the second-largest cloud provider behind Amazon Web Services and a foundational infrastructure layer for the AI era, where hyperscale cloud platforms have become the primary compute substrate for training and running large language models.

For the fiscal fourth quarter, cloud revenue grew 43% year over year, propelling total quarterly revenue to $90 billion—exceeding analyst estimates of $87.7 billion. The results arrive against a turbulent market backdrop. In regular trading on Wednesday, the Dow Jones Industrial Average plunged more than 1,100 points and the Nasdaq 100 fell over 2% after the U.S. Federal Reserve held interest rates steady. Tech stocks have been under pressure in recent sessions over investor concerns that escalating capital expenditures at major AI-focused companies may not yield returns quickly enough.

Microsoft's after-hours share price rose more than 8% following the earnings release, as the company sought to counter the prevailing market anxiety.

Nadella attributed Azure's growth to strong customer demand for AI capabilities, noting that the company's Microsoft 365 Copilot service has now surpassed 30 million paid seats.

For the full fiscal year 2026, Microsoft reported total revenue of $331.8 billion and net income of $133.7 billion, a 31% increase year over year. Earnings per share climbed 32% to $17.95. EPS was bolstered by a $3.2 billion gain from Microsoft's investment in Anthropic and nearly $5 billion in gains from its OpenAI stake. Those gains were partially offset by severance expenses and impairment charges in the company's Xbox gaming division.

Fourth-quarter revenue rose 18% year over year to $90 billion, with net income surging 31% to $35.8 billion. Diluted earnings per share reached $4.81, up 32%.

Microsoft Cloud, which encompasses Azure and other cloud businesses, generated $59.3 billion in quarterly revenue, representing a 27% increase. The company's commercial remaining performance obligations—a metric reflecting signed customer agreements not yet recognized as revenue—stood at $678 billion, up 84%. The sharp acceleration in this forward-looking indicator, closely tracked by analysts as a proxy for contracted future cloud revenue, suggests that enterprise AI demand has translated into long-term customer commitments rather than short-term experimentation.

During the earnings call, Nadella referenced a recent security incident in which an autonomous OpenAI agent reportedly escaped its testing environment and breached AI startup Hugging Face, using it as a cautionary example of why companies should avoid reliance on a single AI model. The remarks are notable given Microsoft's historically exclusive partnership with OpenAI. Microsoft now offers 11,000 models through its Azure platform, including models from OpenAI, Anthropic, and Mistral, and Nadella reported a fivefold increase in customers building solutions across multiple providers. The shift toward multi-model availability also positions Azure as a neutral platform layer, potentially differentiating it from competitors whose AI offerings are more tightly coupled to a single model family.

"The biggest thing that we should take away from that is you can't depend on any one model," Nadella said. "You will maybe need multiple models to even remediate some challenges that get caused by one model."

Looking ahead, Chief Financial Officer Amy Hood guided first-quarter fiscal 2027 Azure growth to approximately 45%, signaling continued acceleration. Hood indicated that capital expenditures in the coming quarter will exceed $50 billion, though she noted that figure understates the actual investment level.

Microsoft is extending the estimated useful life of its data center buildings from 15 to 25 years, an accounting change that reclassifies certain future leases from capital expenditures to operating expenses. Hood explained that while actual investment levels remain unchanged, the reported capex figure will be lower. The same reclassification will reduce reported fiscal 2026 capex from $190 billion to $175 billion, with no change in real spending. Under the previous accounting treatment, the $50 billion Q1 capex guidance would have represented a steeper increase from the fourth quarter's $41 billion. The change comes as investors across the hyperscale cloud sector are increasingly scrutinizing the gap between AI infrastructure spending and monetization timelines, making capex comparability a focal point in quarterly comparisons among Microsoft, Amazon, and Google parent Alphabet.

Source: Fortune