Microsoft reported $90 billion in revenue for the April–June quarter, up 18% from a year earlier. The cloud business, led by Azure, crossed the $100 billion annual revenue mark for the first time. Azure and other cloud services grew 43% year over year, fueled by both traditional migrations and the AI layer — model hosting, vector databases, inference endpoints, and Copilot-style features.
Why the spending is so high
The company spent $41 billion on capital expenditures in the quarter, roughly 70% more than it did in the same period last year. About two-thirds of that went into short-lived assets like CPUs and GPUs. That kind of buildout hits gross margins because new capacity comes online before it's fully utilized. Management said it still expects roughly $190 billion in capex for calendar 2026 under its old accounting method, but a recent change means the reported figure will land closer to $175 billion.
Free cash flow takes a hit
Free cash flow fell to $19.6 billion, down about 23% year over year. The drop reflects the heavy upfront spending on infrastructure. Faster depreciation and refresh cycles on short-lived gear also weigh on cash flow in the near term.
What the market is betting on
Despite the cash flow squeeze, the stock jumped roughly 9% in after-hours trading. Investors are betting that once the new capacity is lit and utilization climbs, Microsoft will see pricing power and operating leverage kick in quickly. The question now is how fast that happens — and whether the AI buildout can deliver the margin expansion the market is pricing in.
