By Deborah Mary Sophia, Stephen Nellis and Aditya Soni
July 29 (Reuters) - Microsoft on Wednesday said it expects to keep generating cash through its just-started fiscal 2027 and gave a capital expenditure forecast below Wall Street estimates after an accounting change for data center leases.
The company also forecast sales and cloud growth that beat expectations for its current fiscal first quarter, after it also topped Wall Street estimates for quarterly cloud revenue growth in its fiscal fourth
quarter ended June 30.
All told, the metrics were a sign Microsoft's massive AI spending bets were paying off, easing investor concerns that one of tech's biggest cash generators was spending heavily in pursuit of profits that had yet to materialize. They also appeared to give investors confidence that Microsoft, which is facing a strong challenge from long-time rival Google in its cloud business, can hang on to its No. 2 position behind cloud leader Amazon.com.
Shares of Redmond, Washington-based Microsoft were up more than 8% in extended trading after its forecast.
Revenue at the company's Azure cloud-computing business rose 43% in its fiscal fourth quarter, compared with analysts' consensus estimate of 39.98%, according to Visible Alpha.
On conference call with analysts, CEO Satya Nadella said the company, which once relied on ChatGPT creator OpenAI for core AI models to power products such as its Copilot assistant, is now carefully designing its own models alongside its own chips and reaping efficiency gains of up to 40%.
Nadella outlined a vision in which Microsoft and its customers would be free to pick and choose AI technologies based on their cost and performance needs.
"That's really the enterprise design architecture that we are going to evangelize. We ourselves are using it," Nadella said.
Microsoft's report follows Google Cloud's blockbuster quarter, with the rival posting an 82% surge in cloud revenue last week, far ahead of market expectations.
"It seemed kind of like Google was taking market share from everybody and they could catch up to the market share of Azure if they keep on that trajectory," said Dave Wagner, portfolio manager at Aptus Capital Advisors. "But what Azure is showing us is that it's staying right there in the race."
SOLID FORECAST, PERFORMANCE
Microsoft forecast a fiscal 2027 first-quarter sales range with a midpoint of $90.4 billion, above estimates of $89.66 billion, according to LSEG data. The company also forecast Azure growth of 45% on a constant currency basis, well above analyst estimates of 40.92%, according to data from Visible Alpha.
Microsoft also said it would now spread long-term leases on data centers over 25 years rather than 15, which has the effect of lowering its annual reported capital expenditures. Microsoft said its spending plans remain unchanged and that it expects reported capital expenditures of $50 billion for the fiscal first quarter of 2027 and $175 billion for the 2026 calendar year.
The first-quarter forecast was below analyst estimates of $56.02 billion, according to Visible Alpha data, and the calendar 2026 estimate was below Microsoft's own previous estimate of $190 billion.
Microsoft's spending is part of $700 billion in unprecedented Big Tech outlays that have strained the companies' cash flows and stoked fears of capacity overbuild. Microsoft's free cash flow for the fiscal 2026 fourth quarter was $19.6 billion, above analyst estimates of $13.44 billion, according to Visible Alpha data, but down 23% from the previous year.
Capital expenditures for the April-June quarter were $41 billion, up more than 70% from last year, and compared with market estimates of $42.37 billion. Microsoft reported $31.9 billion in capital spending in the prior three-month period.
But much more spending could be coming.
In a securities filing, Microsoft said it has data center leases of $329.1 billion that have not yet commenced, with leases starting between its fiscal year 2027 and fiscal year 2033. Microsoft said some of the leases are subject to certain contractual conditions being met before they begin.
Microsoft reported contracted backlog of $678 billion in its cloud business at the end of the quarter, up from $627 billion in the prior quarter. It said all the sequential gains, or about $50 billion in future sales, were driven by commitments from companies outside the leading U.S. AI model makers.
Its M365 Copilot paid seats totaled more than 30 million, compared with 20 million reported last quarter. Analysts on average were expecting 26.9 million Copilot seats, according to Reuters calculations based on estimates from Citi, Morgan Stanley, BNP Paribas and Wells Fargo.
The company is among the worst performers in the so-called "Magnificent Seven" group of mega-caps with an 18% drop so far this year, trailing cloud rivals such as Alphabet.
Overall revenue for the quarter rose 18% to $90 billion, beating estimates. Its per-share profit, excluding the impact from investments in OpenAI, was $4.74, beating expectations of $4.24.
(Reporting by Deborah Sophia in Bengaluru; Editing by Sriraj Kalluvila and Aurora Ellis)
