Microsoft Q3 Earnings Call: Cloud Business Growth Expected to Outpace Market Expectations, Positive Free Cash Flow Maintained This Quarter

October 29 — Microsoft held an earnings call after announcing its fiscal 2026 third-quarter results. The company reported quarterly revenue of $92.3 billion, up 19% year-over-year, and adjusted earnings per share of $4.89, both exceeding market expectations. Microsoft Cloud revenue reached $63.9 billion, up 30% year-over-year, while Azure revenue was $33.17 billion, up 48% year-over-year. Following the earnings release, the stock rose about 4% in after-hours trading.

On the call, CEO Satya Nadella said this quarter was a strong start to the fiscal year. He noted that the company is focused on three things: designing AI to empower people, ensuring every organization has sovereignty over its own learning, and building trust and control to ensure the safety of agents. Nadella also introduced the latest major update to Copilot, integrating Chat, Cowork, Autopilot, and Code into a unified experience, and mentioned the company's continued progress on in-house models.

CFO Amy Hood said on the call that results exceeded expectations on revenue, operating income, and earnings per share, driven primarily by strong demand for Microsoft Cloud. Capital expenditures for the quarter were $45.2 billion, partly due to delays in third-party compute capacity expected to be delivered in the quarter. About three-quarters of capital expenditures went to short-lived assets, mainly CPUs and GPUs, as well as higher memory and storage costs. Commercial remaining performance obligations grew 73% to $677 billion.

In terms of outlook, management provided revenue guidance of $96 billion to $97.1 billion for the next quarter and expects Azure growth (constant currency) of 49% to 50%, above market expectations. Hood said customer demand continues to exceed supply. Capital expenditures for the next quarter are expected to exceed $50 billion; due to delays in third-party compute deliveries, calendar 2026 capital expenditures are expected to be about $170 billion, with further acceleration in the second half of the fiscal year. The company also expects Microsoft Cloud gross margin of about 65%, under some pressure due to the growing share of the Azure business.

Unlike some peers, Microsoft maintained positive free cash flow this quarter (about $18.6 billion), despite a year-over-year decline. Hood said the company is confident in the returns on capital expenditures and has multiple financing flexibilities.

The market reacted positively to the quarter's results. Investors believe that amid heavy AI investment, Azure still achieved accelerating growth and guidance was raised, somewhat easing concerns about the pace of returns on capital expenditures. However, management also acknowledged that compute supply remains tight, capital expenditures will continue to rise in the second half, and the impact of related investments on gross margin and cash flow remains a key focus going forward.