Microsoft expects strong cloud business growth, plans record capital spending
Microsoft’s Cloud Growth, Capital Spending, and Competitive Landscape
By Aditya Soni and Stephen Nellis
April 29 (Reuters) - Microsoft on Wednesday forecast that sales at its Azure cloud business would beat Wall Street forecasts this year, and the software giant unveiled plans for 2026 capital spending of $190 billion, which also surpassed expectations.
Market Reaction and Competitive Context
After the forecast, Microsoft shares were even with their close, rebounding from a fall of more than 2% in extended trading after quarterly results showed only a modest increase in cloud revenue growth. Rival Google reported a stronger rise in cloud growth and Alphabet shares surged more than 4% after hours.
Big Tech's race for AI dominance is intensifying, with investors rewarding companies that deliver standout growth. Some investors are growing more concerned Microsoft’s reliance on partners such as OpenAI may no longer guarantee an edge. Many also worry that Microsoft's large business customers have been slow to adopt its Copilot 365 assistant.
Azure and Cloud Revenue Outlook
Microsoft said it expects revenue for its Azure and other cloud services business to grow between 39% and 40%, in constant currency, in the fiscal fourth quarter, which would beat the estimate of 36.7% growth from Visible Alpha.
Revenue at the unit rose 40% in fiscal third quarter, quicker than the 39% growth in the previous three months, but in line with a consensus estimate.
In contrast, smaller rival Google Cloud posted a 63% rise in revenue that blew past estimates for a 50.1% growth.
Microsoft forecast fiscal fourth-quarter revenue of between $86.7 billion and $87.8 billion, largely in line with an average LSEG estimate.
Microsoft said it expects to spend $190 billion this year, which according to data from Visible Alpha far exceeds analyst forecasts for spending of more than $150 billion.
Copilot and AI Business Performance
Copilot User Growth
COPILOT STILL SLUGGISH
Users of the $30 per month M365 Copilot AI assistant rose to 20 million from 15 million disclosed in January, said Jonathan Neilson, Microsoft's vice president of investor relations.
"The fact that we added 5 million seats in one quarter is certainly a message that we feel very, very good about," Neilson said.
AI Revenue and Capital Expenditures
Microsoft also said it has an AI run rate of $37 billion, measuring how much revenue it expects to come from selling infrastructure to third parties such as OpenAI, plus sales of its own AI offerings over the next year.
Microsoft said capital expenditures in the fiscal third quarter rose 49% from a year earlier to $31.9 billion, but were down from $37.5 billion in the second quarter. Wall Street had expected $34.90 billion in quarterly capital spending, according to Visible Alpha.
The amount Microsoft spent on finance leases - which are often on large data center sites - declined to $4.7 billion in the fiscal third quarter from $6.7 billion in the previous quarter.
Neilson told Reuters that figure did not reflect a slowdown in AI demand but rather the specific calendar dates when particular leases commence, which is when Microsoft recognizes their full cost in its financial reporting.
Strategic Partnerships and Competitive Shifts
Changes in OpenAI Partnership
MICROSOFT WILL NO LONGER HAVE EXCLUSIVE OPENAI ACCESS
To sharpen its competitive edge, Microsoft has added Anthropic's technology to its cloud service and products like Copilot amid rising demand for the Claude creator's models.
Earlier this week, Microsoft also overhauled its OpenAI deal to lock in its 20% cut of the startup's revenue through 2030 regardless of whether it achieves technological breakthroughs.
Impact of New Arrangements on Cloud Competition
But the new arrangement also strips Microsoft of exclusive rights to resell OpenAI's products on its cloud. Competition in this area has been heating up from Alphabet and Amazon, the e-commerce giant that has already started offering OpenAI's latest models and Codex coding tool on its cloud.
The move could free up cloud capacity for Microsoft, which has blamed shortages for holding back revenue growth and used that to argue for its massive spending.
Cost-Cutting Measures Across Big Tech
Funding those outlays has, however, forced companies to look for ways to cut costs. Microsoft earlier this month rolled out its first employee buyout program in more than five decades.
Amazon and Meta have also announced job cuts affecting thousands of employees.
(Reporting by Aditya Soni in Bengaluru; Editing by Sriraj Kalluvila and David Gregorio)