At a Glance

  • Microsoft executives said on Wednesday's earnings call that enterprise adoption of its 365 Copilot tool is on track, and the company is increasing capital expenditures to match growing demand for AI services. The call covered the company's third-quarter results for fiscal year 2026.
  • "Sequentially, we continue to see accelerating growth, and Microsoft 365 Copilot now has over 20 million paid seats," CEO Satya Nadella told analysts on the call. "The number of customers with more than 50,000 seats has quadrupled year over year."
  • Chief Financial Officer Amy Hood said the company's AI business achieved annualized revenue growth of 123% year over year, exceeding $37 billion. The AI business accounted for a significant portion of the company's third-quarter total revenue, which grew 18% to $82.9 billion.

Deep Dive

Hyperscale cloud providers are aggressively competing for enterprise AI spending, investing billions to expand capacity in hopes of quickly realizing returns on investment. So far, the data suggests this bet is paying off.

In response to growing demand, Microsoft raised its capital expenditures for the next quarter, primarily to support computing capacity expansion. The company said third-quarter capital expenditures totaled $31.9 billion. It plans to spend over $40 billion next quarter, citing a $5 billion increase related to higher component prices and the impact of finance leases.

"We added another gigawatt of capacity this quarter and are on track to double our overall footprint within two years," Nadella said. "We are actively adding capacity based on the demand signals we see and have announced new data center investments across four continents."

Overall, Microsoft expects capital expenditures of $190 billion for the current calendar year, matching Alphabet's forecast and slightly below Amazon's target of $200 billion.

Despite rapid growth, the cloud market is expected to continue expanding, driven by new use cases, according to John Dinsdale, chief analyst at Synergy Research Group.

"Year-over-year growth rose for the ninth consecutive quarter to 35%," Dinsdale said in an emailed statement. "This is the highest growth rate since the fourth quarter of 2021, when the market was only 40% of its current size."

On the earnings call, Microsoft executives mentioned updates to its partnership terms with OpenAI. The adjustment, announced on Monday, removed the exclusivity of the model provider to Microsoft while retaining Azure as the primary computing provider. A day later, OpenAI announced it would bring its models to AWS.

"Overall, we are pleased with our partnership with OpenAI," Nadella said. "We have a frontier model, royalty-free, with all intellectual property, available through 2032, and we plan to fully leverage it."

As CIOs navigate shifts in the vendor market, they must carefully evaluate the strengths and weaknesses of each provider, said Olivier Blanchard, research director and head of the intelligent devices practice at The Futurum Group.

"If our strategy relies on a technology stack, Microsoft may still be your best choice," Blanchard said. "For example, if your employees are already using Copilot and your data is stored in Microsoft Fabric, then Azure will offer the lowest friction for AI adoption."

However, Blanchard believes that in terms of technical capabilities, Google Cloud stands out in the vendor landscape, while AWS offers greater vendor neutrality.

"CIOs should not simply rely on a single vendor to meet the needs of the entire organization, but rather work tactically with each vendor based on each common use case," Blanchard said.