Microsoft earnings: Cloud growth overshadows CAPEX & FCF questions

Microsoft delivered a solid quarter, materially ahead of expectations. The positive surprises were concentrated in the Cloud segment, which is currently at the center of shareholders’ and the market’s attention. In after hours trading, the company’s shares are up about 3 to 4 percent.

• Revenue rose 19 percent year on year to USD 92.28 billion, versus expectations of around USD 91 billion.
• Operating profit increased 21 percent year on year to USD 4.92 billion.
  • On an adjusted EPS basis, profit rose 18 percent to USD 4.89, versus an expected approximately USD 4.72.
  • At the same time, the operating margin improved from about 48.9 percent to 49.8 percent.
  • Azure performed best, accelerating growth to 48 percent year on year and reaching USD 33.17 billion.

Azure is the strongest argument for the market’s positive reaction. Management had previously guided for growth of around 45 percent at constant currency.

• On the negative side are capital expenditures and cash spending. CAPEX increased 103 percent year on year to USD 39.37 billion.
• This is reflected in a decline in FCF to USD 18.63 billion. That represents a drop in FCF coverage of net income to 51 percent, compared with 92 percent a year ago.

Crucially in the context of investment, Microsoft changed its accounting policy and announced an extension of the estimated useful life of data centers and buildings from 15 to 25 years.

This means that part of future agreements shifts from finance leases to operating leases, reducing reported CAPEX without a corresponding reduction in investment. The company cited this as the reason for revising its 2026 spending outlook to around USD 175 billion.

This information did not reach the market in a vacuum. A few days before the earnings call, the company offered a voluntary buyout to 60,000 employees, roughly one quarter of its global workforce. This signals to the market that Microsoft is actively managing margins to offset rising capital expenditures.

The most important questions remain unanswered. The company is expanding, improving efficiency, and the Azure segment is delivering unprecedented profit growth. At the same time, the scale of investment means that the value remaining for shareholders is clearly falling.

The final takeaway from the release is that, for now, the market is satisfied with Cloud growth running above already optimistic expectations.

Questions about a genuine return of value to shareholders may quiet down until the next earnings call, this time covering the full calendar year.