Microsoft NASDAQ: MSFT executives told investors the company delivered a “record third quarter,” fueled by continued demand for cloud services and accelerating adoption of its AI offerings, while acknowledging that capacity constraints and heavy infrastructure investment remain central themes heading into the final quarter of its fiscal year.
Record quarter led by cloud and AI momentum
Chairman and CEO Satya Nadella said Microsoft Cloud revenue exceeded $54 billion in the quarter, up 29% year-over-year. Nadella also said Microsoft’s AI business surpassed a $37 billion annual revenue run rate (ARR), up 123%.
Nadella framed the current environment as an early stage of a platform transition driven by “agents” becoming a dominant workload. He said Microsoft is pursuing two priorities: building cloud and AI infrastructure for “agentic computing,” and building “high-value agentic systems” in areas such as productivity, coding, and security.
Infrastructure build-out and capacity constraints
Nadella detailed operational efforts to expand data center and GPU capacity. He said Microsoft reduced “dock-to-live times for new GPUs” in its largest regions by nearly 20% since the beginning of the year. Nadella added that the company’s Fairwater data center in Wisconsin came online “six weeks ahead of schedule,” allowing Microsoft to recognize revenue earlier.
Microsoft also reported performance improvements in AI inference. Nadella said the company delivered a 40% improvement in inference throughput for its most used models across Copilot, driven by software and hardware optimization work. He said the company added “another gigawatt of capacity” during the quarter and remains on track to double its overall footprint in two years.
Nadella highlighted Microsoft’s use of first-party and partner silicon. He said Maia 200 AI accelerators are live in Iowa and Arizona and offer “over 30% improved tokens per dollar” compared to the latest silicon in Microsoft’s fleet. He also said the company’s Cobalt server CPU is deployed in nearly half of its data center regions and is running workloads for customers including Databricks, Siemens, and Snowflake.
Chief Financial Officer Amy Hood said demand continues to exceed available capacity. In Intelligent Cloud, she said Azure results were ahead of expectations because Microsoft “delivered capacity earlier in the quarter,” enabling increased consumption across AI and non-AI services. Hood added that “strong customer demand across workloads, customer segments, and geographic regions continues to exceed available capacity.”
Copilot, GitHub, and agent adoption across the portfolio
Nadella said Microsoft is evolving Copilot “from synchronous assistants to async coworkers” that can execute long-running tasks. In Microsoft 365 Copilot, he reported a record quarter for seat additions, with paid seats now above 20 million. Nadella said seat adds increased 250% year-over-year and that Accenture has more than 740,000 seats, calling it Microsoft’s largest Copilot win to date. He also cited customer commitments of 90,000 or more seats from Bayer, Johnson & Johnson, Mercedes, and Roche.
Nadella pointed to usage trends, saying first-party agent monthly active usage is up 6x year-to-date and Copilot queries per user rose nearly 20% quarter-over-quarter. He said weekly engagement is “now at the same level as Outlook.”
In developer tools, Nadella said nearly 140,000 organizations use GitHub Copilot and enterprise subscribers “have nearly tripled” year-over-year. He also said Microsoft recently announced a shift to usage-based pricing for GitHub Copilot.
In business applications, Nadella said customers are increasingly moving to “seats plus consumption,” noting that nearly 60% of Microsoft’s customer service category customers are purchasing usage-based credits. He cited HSBC’s use of pre-built agents with Dynamics 365, saying it reduced issue resolution time by over 30%.
In security, Nadella said the number of Security Copilot customers increased 2x year-over-year. He added that data security triage agents handled over 2 million unique alerts in the quarter and that 35 billion Copilot interactions have been audited by Purview to date, up 7x year-over-year.
Nadella also highlighted consumer metrics, including Windows monthly active devices surpassing 1.6 billion, Edge taking share for 20 consecutive quarters, and Bing reaching 1 billion monthly active users for the first time.
Financial results: revenue, margins, and capital spending
Hood said the company exceeded expectations across revenue, operating income, and earnings per share. Revenue was $82.9 billion, up 18% (15% in constant currency). Gross margin dollars increased 16% (13% in constant currency), and operating income grew 20% (16% in constant currency). Earnings per share was $4.27, up 21% (18% in constant currency), which Hood said was adjusted for the impact from Microsoft’s investment in OpenAI.
Company gross margin percentage was 68%, down year-over-year, which Hood attributed to continued AI infrastructure investment and growing AI product usage, partially offset by efficiency gains, “particularly in Azure and M365 Commercial Cloud.” Operating expenses increased 9% (8% in constant currency), driven by AI investment in R&D compute capacity, talent, and data. Operating margins increased slightly to 46%, and Hood said headcount declined year-over-year.
Capital expenditures were $31.9 billion, down sequentially due to variability in cloud build-outs and finance lease timing. Hood said roughly two-thirds of CapEx was for short-lived assets such as GPUs and CPUs, with the remainder for long-lived assets supporting monetization over “the next 15 years and beyond.” The company reported $46.7 billion in cash flow from operations, up 26%, and free cash flow of $15.8 billion. Microsoft returned $10.2 billion to shareholders through dividends and share repurchases.
By segment, Hood reported:
- Productivity and Business Processes: Revenue of $35.0 billion, up 17% (13% constant currency). Microsoft 365 commercial cloud revenue grew 19% (15% constant currency). LinkedIn revenue rose 12% (9% constant currency). Dynamics 365 revenue increased 22% (17% constant currency), though bookings were impacted by weaker renewals as customers balanced per-seat and “seats plus consumption.”
- Intelligent Cloud: Revenue of $34.7 billion, up 30% (28% constant currency). Azure and other cloud services revenue grew 40% (39% constant currency).
- More Personal Computing: Revenue of $13.2 billion, down 1% (3% constant currency). Search advertising revenue ex-TAC increased 12% (9% constant currency). Gaming revenue declined 7% (9% constant currency).
Outlook: higher Q4 CapEx, ongoing constraints, and model evolution
For the fourth quarter, Hood guided to total company revenue of $86.7 billion to $87.8 billion, implying 13% to 15% growth. She said Microsoft Cloud gross margin percentage should be roughly 64%, down year-over-year, driven by AI investments and increased GitHub Copilot usage.
Segment guidance included Productivity and Business Processes revenue of $37.0 billion to $37.3 billion, Intelligent Cloud revenue of $37.95 billion to $38.25 billion, and More Personal Computing revenue of $11.75 billion to $12.25 billion. Hood said Azure revenue growth is expected to be 39% to 40% in constant currency, with demand still exceeding supply.
Hood said the Q4 outlook includes roughly $900 million in one-time costs related to a voluntary retirement program—about $350 million in cost of goods sold and $550 million in operating expenses.
On capital spending, Hood said Q4 CapEx is expected to increase to “over $40 billion” as Microsoft brings more capacity online, including roughly $5 billion related to higher component pricing and finance lease timing. For calendar year 2026, Hood said Microsoft expects to invest roughly $190 billion in capital expenditures, including about $25 billion from higher component pricing. She said Microsoft expects to remain capacity constrained “at least through 2026.”
During Q&A, Hood and Nadella repeatedly emphasized a shift toward “per-user and usage” business models, with Hood describing an evolution from traditional license bookings toward a mix of license and metered consumption. Nadella said the dollars supporting AI spend ultimately need to come from measurable business outcomes, including cost reductions or revenue gains. He added that seat-based pricing can provide predictability, with consumption and “overages” expanding beyond a base level of usage entitlement.
Microsoft also addressed its relationship with OpenAI. Nadella said Microsoft remains “very focused” on maintaining a “win-win construct,” noting access to a “frontier model, royalty-free” through 2032 and describing OpenAI as a large customer across AI and broader compute. Hood added that revenue share predictability through 2030 is a “real positive,” and referenced “the elimination of our rev share to them” while emphasizing Microsoft’s royalty-free IP access.
About Microsoft NASDAQ: MSFT
Microsoft Corporation is a global technology company headquartered in Redmond, Washington. Founded in 1975 by Bill Gates and Paul Allen, Microsoft develops, licenses and supports a broad range of software products, services and devices for consumers, enterprises and governments worldwide. Its operations span personal computing, productivity software, cloud infrastructure, enterprise applications, developer tools and gaming.
Microsoft's product portfolio includes the Windows operating system and the Microsoft 365 suite of productivity and collaboration tools (Office apps, Outlook, Teams).
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