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 stated its demand backlog had greater than doubled, to $625 billion, with a lift from OpenAI. However the tech large’s inventory tumbled practically 5% in after-hours buying and selling, following a second quarter earnings launch that confirmed a slowdown in Azure income progress and capability constraints that Microsoft admitted will prolong to “not less than” the top of its fiscal 12 months in June.
In the course of the earnings name with analysts after market shut on Wednesday, chairman and CEO Satya Nadella and chief monetary officer Amy Hood have been pressed on investor fears over a slowdown in income progress 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 progress. Primarily, traders are nervous they may be seeing the primary blush of a yellow flag.
“One of many core points that’s weighing on traders is capex is rising quicker than we anticipated, and perhaps Azure is rising a bit bit slower than we anticipated,” stated Keith Weiss, head of U.S. software program analysis at Morgan Stanley, throughout the name. “That essentially comes all the way down to a priority 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 belongings 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 whole to $72.4 billion, signaling important infrastructure spending. Within the first quarter, Hood advised traders the corporate was seeing rising demand and a rising RPO steadiness that meant it might enhance its chips spending.
In the meantime, Azure progress flattened out, falling from 40% within the first quarter to 39% within the second. “We proceed to see robust demand throughout workloads, buyer segments and geographic areas, and demand continues to exceed accessible provide,” stated Hood throughout the name.
The newest earnings figures have traders fascinated about capability constraints, and ROI questions.
Hood pushed again on the concept traders ought to draw a direct correlation between capital expenditures and Azure’s income figures. “Generally I believe it’s most likely higher to consider the Azure steerage that we give as an allotted capability information about what we are able to ship in Azure income,” Hood advised Weiss in response to his query.
“The very first thing we’re doing is fixing for the elevated utilization and gross sales and the accelerating tempo of the M365 Copilot, in addition to GitHub Copilot,” she stated. Then, Microsoft invests in R&D and product innovation, that are each long-term investments. “You find yourself with the rest going towards serving the Azure capability that continues to develop when it comes to demand,” stated Hood.
If Microsoft had allotted all new GPUs from the primary and second quarters solely to Azure, Hood acknowledged, Azure’s progress would have been effectively above the 39% Microsoft reported.
Nadella underscored Hood’s level, noting that traders ought to consider efficiency throughout the whole AI enterprise. He stated traders ought to “clearly” take into account Azure, however shouldn’t overlook about Microsoft 365 Copilot, Github Copilot, Dragon Copilot, and Safety Copilot, all of which incorporate AI.
“Buying an Azure buyer is tremendous vital to us, however so is buying an M365, or a GitHub or a Dragon Copilot [customer],” stated Nadella. He stated compute spending additionally capabilities as an R&D-like funding.
“You’ve obtained to consider compute as additionally R&D, and that’s kind of the second component of it,” stated Nadella. “And so we’re utilizing all that, clearly, to optimize for the long run.”
Nonetheless, traders are more likely to stay involved that the continued capability constraints may forestall the tech large from changing its file RPO backlog, reported in filings within the type of remaining efficiency obligations (RPO), into income progress as quick as Wall Avenue expects. As well as, traders will probably be wanting subsequent quarter for indicators that the infrastructure spending is justified by income progress.
Regardless of the investor considerations and the after-hours inventory drop, a lot of the information from the newest earnings report was optimistic. Microsoft reported second quarter income of $81.3 billion, up 17% from $69.6 billion a 12 months in the past, leapfrogging previous the corporate’s steerage of $79.5 billion to $80.6 billion. Working earnings grew 21% to $38.3 billion from $31.7 billion, whereas diluted earnings per share rose 24% to $4.14 from $3.35. Furthermore, the cloud enterprise cracked $50 billion in quarterly income for the primary time ever, hitting $51.5 billion, progress of 26% 12 months over 12 months.
RPO was up 110% 12 months over 12 months to $625 billion, pushed partly by a $250 billion dedication from OpenAI that was introduced in October. Hood stated traders 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 shoppers grew 28% 12 months over 12 months, which Hood stated was bigger than most of Microsoft’s friends.
Some “55% or roughly $350 billion is expounded to the breadth of our portfolio, breadth of shoppers, throughout options, throughout Azure, throughout industries, throughout geographies,” stated Hood. “Frankly, I believe we’ve tremendous excessive confidence in it.”
