It was an earnings report that contained some beautiful numbers: Microsoft reported crossing a big $50 billion quarterly income milestone for its cloud enterprise, and mentioned its demand backlog had greater than doubled, to $625 billion, with a lift from OpenAI. However the tech big’s inventory tumbled almost 5% in after-hours buying and selling, following a second quarter earnings launch that confirmed a slowdown in Azure income development and capability constraints that Microsoft admitted will prolong to “at least” the top of its fiscal yr in June.
Throughout the earnings name with analysts after market shut on Wednesday, chairman and CEO Satya Nadella and chief monetary officer Amy Hood had been pressed on investor fears over a slowdown in income development for the Azure platform amid hovering capital expenditures—each indicators that the corporate is struggling to maintain up with AI demand. These two figures mixed have given rise to questions on whether or not Microsoft can construct out computing capability as quick as deliberate, and if that concern will additional restrict Azure’s development. Primarily, buyers are fearful they could be seeing the primary blush of a yellow flag.
“One of the core issues that is weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected,” mentioned Keith Weiss, head of U.S. software program analysis at Morgan Stanley, throughout the name. “That fundamentally comes down to a concern on the [return on investment], on this capex spend over time.”
To level-set: Microsoft spent $34.9 billion on capital expenditures within the first quarter of fiscal 2026 alone, with roughly half devoted to property together with GPUs and CPUs, that are the chips it makes use of in PCs, servers, and the Azure information facilities. In Q2, capex was roughly $37.5 billion, which introduced the primary half complete to $72.4 billion, signaling vital infrastructure spending. Within the first quarter, Hood informed buyers the corporate was seeing rising demand and a rising RPO stability that meant it might enhance its chips spending.
In the meantime, Azure development flattened out, falling from 40% within the first quarter to 39% within the second. “We continue to see strong demand across workloads, customer segments and geographic regions, and demand continues to exceed available supply,” mentioned Hood throughout the name.
The most recent earnings figures have buyers fascinated about capability constraints, and ROI questions.
Hood pushed again on the concept buyers ought to draw a direct correlation between capital expenditures and Azure’s income figures. “Sometimes I think it’s probably better to think about the Azure guidance that we give as an allocated capacity guide about what we can deliver in Azure revenue,” Hood informed Weiss in response to his query.
“The first thing we’re doing is solving for the increased usage and sales and the accelerating pace of the M365 Copilot, as well as GitHub Copilot,” she mentioned. Then, Microsoft invests in R&D and product innovation, that are each long-term investments. “You end up with the remainder going toward serving the Azure capacity that continues to grow in terms of demand,” mentioned Hood.
If Microsoft had allotted all new GPUs from the primary and second quarters solely to Azure, Hood acknowledged, Azure’s development would have been nicely above the 39% Microsoft reported.
Nadella underscored Hood’s level, noting that buyers ought to consider efficiency throughout all the AI enterprise. He mentioned buyers ought to “obviously” think about Azure, however shouldn’t neglect about Microsoft 365 Copilot, Github Copilot, Dragon Copilot, and Safety Copilot, all of which incorporate AI.
“Acquiring an Azure customer is super important to us, but so is acquiring an M365, or a GitHub or a Dragon Copilot [customer],” mentioned Nadella. He mentioned compute spending additionally capabilities as an R&D-like funding.
“You’ve got to think about compute as also R&D, and that’s sort of the second element of it,” mentioned Nadella. “And so we’re using all that, obviously, to optimize for the long term.”
Nonetheless, buyers are prone to stay involved that the continued capability constraints may forestall the tech big from changing its report RPO backlog, reported in filings within the type of remaining efficiency obligations (RPO), into income development as quick as Wall Avenue expects. As well as, buyers will likely be trying subsequent quarter for indicators that the infrastructure spending is justified by income development.
RPO was up 110% yr over yr to $625 billion, pushed partly by a $250 billion dedication from OpenAI that was introduced in October. Hood mentioned buyers shouldn’t fear in regards to the publicity to one in all Microsoft’s main companions, stating that roughly $344 billion of the RPO got here from a various set of different clients. RPO from that set of consumers grew 28% yr over yr, which Hood mentioned was bigger than most of Microsoft’s friends.
Some “55% or roughly $350 billion is related to the breadth of our portfolio, breadth of customers, across solutions, across Azure, across industries, across geographies,” mentioned Hood. “Frankly, I think we have super high confidence in it.”
