It was an earnings report that contained some gorgeous numbers: Microsoft reported crossing a big $50 billion quarterly revenue milestone for its cloud enterprise, and mentioned its demand backlog had greater than doubled, to $625 billion, with a lift from OpenAI. But the tech big’s inventory tumbled practically 5% in after-hours buying and selling, following a second quarter earnings launch that confirmed a slowdown in Azure revenue growth and capability constraints that Microsoft admitted will lengthen to “at least” the top of its fiscal 12 months in June.
During 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 revenue growth for the Azure platform amid hovering capital expenditures—each indicators that the corporate is struggling to sustain with AI demand. Those 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 challenge will additional restrict Azure’s growth. Essentially, investors are nervous they is perhaps seeing the primary blush of a yellow flag.
“One of the core issues that is weighing on investors is capex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected,” mentioned Keith Weiss, head of U.S. software program analysis at Morgan Stanley, throughout the name. “That fundamentally comes down to a concern 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 complete to $72.4 billion, signaling vital infrastructure spending. In the primary quarter, Hood advised investors the corporate was seeing rising demand and a rising RPO stability that meant it could enhance its chips spending.
Meanwhile, Azure growth flattened out, falling from 40% within the first quarter to 39% within the second. “We continue to see strong demand across workloads, customer segments and geographic regions, and demand continues to exceed available supply,” mentioned Hood throughout the name.
The newest earnings figures have investors fascinated about capability constraints, and ROI questions.
Hood pushed again on the concept that investors ought to draw a direct correlation between capital expenditures and Azure’s revenue figures. “Sometimes I think it’s probably better to think about the Azure guidance that we give as an allocated capacity guide about what we can deliver in Azure revenue,” Hood advised Weiss in response to his query.
“The first thing we’re doing is solving for the increased usage and sales and the accelerating pace of the M365 Copilot, as well as GitHub Copilot,” she mentioned. Then, Microsoft invests in R&D and product innovation, that are each long-term investments. “You end up with the remainder going toward serving the Azure capacity that continues to grow in terms of demand,” mentioned Hood.
If Microsoft had allotted all new GPUs from the primary and second quarters solely to Azure, Hood acknowledged, Azure’s growth would have been properly above the 39% Microsoft reported.
Nadella underscored Hood’s level, noting that investors ought to consider efficiency throughout the complete AI enterprise. He mentioned investors ought to “obviously” take into account Azure, but shouldn’t neglect about Microsoft 365 Copilot, Github Copilot, Dragon Copilot, and Security Copilot, all of which incorporate AI.
“Acquiring an Azure customer is super important to us, but so is acquiring an M365, or a GitHub or a Dragon Copilot [customer],” mentioned Nadella. He mentioned compute spending additionally capabilities as an R&D-like funding.
“You’ve got to think about compute as also R&D, and that’s sort of the second element of it,” mentioned Nadella. “And so we’re using all that, obviously, to optimize for the long term.”
Still, investors are seemingly to stay involved that the continuing capability constraints might forestall the tech big from changing its document RPO backlog, reported in filings within the type of remaining efficiency obligations (RPO), into revenue growth as quick as Wall Street expects. In addition, investors might be wanting subsequent quarter for indicators that the infrastructure spending is justified by revenue growth.
Despite 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 revenue of $81.3 billion, up 17% from $69.6 billion a 12 months in the past, leapfrogging previous the corporate’s steering of $79.5 billion to $80.6 billion. Operating revenue grew 21% to $38.3 billion from $31.7 billion, whereas diluted earnings per share rose 24% to $4.14 from $3.35. Moreover, the cloud enterprise cracked $50 billion in quarterly revenue for the primary time ever, hitting $51.5 billion, growth 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 mentioned investors shouldn’t fear concerning the publicity to considered one of Microsoft’s main companions, declaring that roughly $344 billion of the RPO got here from a various set of different prospects. RPO from that set of consumers grew 28% 12 months over 12 months, which Hood mentioned was bigger than most of Microsoft’s friends.
Some “55% or roughly $350 billion is related to the breadth of our portfolio, breadth of customers, across solutions, across Azure, across industries, across geographies,” mentioned Hood. “Frankly, I think we have super high confidence in it.”
