Why has Microsoft’s artificial intelligence business revenue skyrocketed?

Microsoft recently released its fiscal year 2026 third-quarter earnings (covering the first quarter of 2026), delivering strong results that exceeded market expectations. Revenue growth was primarily driven by the continued expansion of its AI and cloud computing businesses.

This quarter, Microsoft achieved revenue of $82.9 billion, an 18% year-over-year increase. Net income (calculated according to GAAP) reached $31.78 billion, a significant 23% year-over-year growth.

Key Financial Data

• Revenue: $82.9 billion (+18% YoY)

• Net Income (GAAP): $31.78 billion (+23% YoY)

• Net Income (Non-GAAP): $31.79 billion (+20% YoY)

• Microsoft Cloud Revenue: $54.5 billion (+29% YoY)

• Azure Growth Rate: 40%

Microsoft has maintained approximately 15% revenue growth for 11 consecutive quarters, demonstrating consistent operational capability.

AI Business Annual Revenue Surpasses $37 Billion

Microsoft CEO Satya Nadella revealed that the company’s AI business has exceeded $37 billion in annual revenue, a 123% increase year-over-year.

AI has become the company’s core growth engine, with key drivers including:

• Strong demand for Azure AI services.

• Rapid adoption of Copilot products across the entire portfolio.

• Increasingly deep integration of enterprise-level AI applications.

Taking GitHub Copilot as an example, nearly 140,000 organizations are currently using it, with usage nearly tripling year-over-year.

Cloud Business Maintains Strong Momentum

Microsoft Cloud generated $54.5 billion in revenue this quarter, up 29% year-over-year.

Performance across key segments:

• Intelligent Cloud: $34.7 billion (+30% YoY).

• Azure and Other Cloud Services: +40% growth.

Additionally, Microsoft’s Remaining Performance Obligations (RPO) reached $627 billion, a 99% year-over-year surge, indicating high visibility for future revenue.

Copilot and AI Model Technological Upgrades

Microsoft continues to increase its investment in AI infrastructure and models:

• Copilot core model inference throughput increased by 40%.

• The Azure Maia 200 accelerator improved token processing capacity by over 30%.

• Launch of new models: MAI-Transcribe-1 (speech-to-text) and MAI-Image-2 (image generation).

These models are now widely used in scenarios such as PowerPoint image generation and real-time transcription for Teams meetings.

Capital Expenditure and Infrastructure Expansion

Microsoft’s capital expenditure this quarter reached $31.9 billion, up 49% year-over-year.

Key investment areas include:

• Procurement of GPUs and CPUs for AI workloads.

• Data center expansion.

• Large-scale deployment of cloud infrastructure.

This quarter, Microsoft added 1 gigawatt (GW) of computing capacity and plans to double its infrastructure scale within two years.

Business Segment Performance

Revenue breakdown:

• Productivity and Business Processes: $35.0 billion (+17% YoY).

• Intelligent Cloud: $34.7 billion (+30% YoY).

• More Personal Computing: $13.2 billion (-1% YoY).

Consumer-related businesses showed slight weakness:

• Windows OEM revenue: -2%.

• Xbox content and services: -5%.

However, search and news advertising revenue grew by 12%, partially offsetting these declines.

OpenAI Partnership Adjustment Improves Profit Margins

Microsoft recently adjusted its partnership structure with OpenAI:

• The company no longer pays revenue-sharing fees.

• This quarter, it only incurred a $14 million impairment impact, which is negligible.

This adjustment is expected to improve the company’s profit margins in the long term.

Stable Performance Guidance

Microsoft remains optimistic about its outlook for the next quarter:

• Projected total revenue: $86.7 billion – $87.8 billion.

• Growth projection: 13% – 15% year-over-year.

• Azure projected growth: 39% – 40%.

This forecast indicates that Microsoft’s core business segments will continue to maintain stable expansion.

Stock Performance and Market Reaction

Despite beating earnings expectations, Microsoft’s stock experienced short-term volatility:

• After-hours trading saw a brief 3% decline, followed by a recovery.

• Year-to-date, the stock has declined by approximately 12%.

• Closing price: $424.46 per share.

• Market capitalization: Approximately $3.15 trillion.

Outlook: AI as Microsoft’s Core Growth Engine

Microsoft’s strong quarterly performance reveals a clear trend:

• AI and cloud businesses are the core drivers of revenue and profit.

• Enterprise demand remains robust.

• Infrastructure investments are scaling rapidly.

Of course, the company still faces challenges:

• High costs of AI infrastructure.

• Slowing growth in consumer-facing businesses.

In the future, Microsoft’s success will depend on the efficiency of its AI commercialization and whether Azure can sustain its strong growth momentum.