By Deborah Mary Sophia, Stephen Nellis and Aditya Soni
July 29 (Reuters) - Microsoft on Wednesday said it expects to keep generating cash through its fiscal 2027 and gave a capital expenditure forecast below Wall Street estimates after changing how it accounts for long-term 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 the just-ended quarter.
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. 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.
"This year, Azure revenue surpassed $100 billion for the first time, and Microsoft 365 Copilot reached over 30 million paid seats, reflecting the confidence customers are placing in us to power their AI transformation," CEO Satya Nadella said.
The strong growth could ease concerns about the company's surging data center outlays and fears that AI tools could displace its long-reliable productivity software business.
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 reported capital expenditures. Microsoft said its spending plans remain unchanged but 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 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.
Microsoft has forecast spending $190 billion this calendar year, part of the more than $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, with lease terms between one and 20 years. Microsoft said some of the leases are subject to certain contractual conditions being met before they begin.
"They will last many, many, many years. It can be lumpy even in terms of when leases are signed," said Jonathan Neilson, Microsoft's vice president of investor relations. "Again, it always comes back to the demand signal we're seeing."
Meanwhile, the company is cutting dependence on OpenAI's technology by adding Anthropic's models into its offerings and developing in-house AI, while leaning on its deep business ties to boost adoption of the $30-a-month Copilot, including through deals such as the one with Accenture earlier this year.
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.
Microsoft has said its cloud growth is being held back by capacity constraints that it expects to persist at least through the end of 2026. That has forced the company to choose between powering its own AI services such as the 365 Copilot assistant and renting computing power to customers through Azure.
Still, some analysts say the concerns around Microsoft are overblown, noting that AI demand remains strong and it has made efforts to ease constraints through deals beyond its own data-center build-out, such as a recent tie-up with France's Mistral.
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)
