Microsoft shares slide seven percent in extended trading on Wednesday after the company reported slowing Azure cloud growth and issued weaker-than-expected operating margin guidance, despite beating Wall Street forecasts on revenue and earnings.
Microsoft posted fiscal second-quarter results that exceeded analyst expectations, but investors focused on decelerating cloud momentum and rising costs tied to artificial intelligence infrastructure. The stock decline followed the company’s earnings release after markets closed.
The software maker reported adjusted earnings of $4.14 per share on revenue of $81.27 billion, topping LSEG consensus estimates of $3.97 per share and $80.27 billion in revenue. Revenue rose 16.7% from a year earlier, while net income increased to $38.46 billion, up from $24.11 billion in the prior-year quarter.
Cloud growth, however, continued to slow. Revenue from Azure and other cloud services rose 39%, down from 40% growth in the previous quarter. Microsoft forecast Azure growth of 37% to 38% in constant currency for the current quarter, roughly in line with expectations but below levels seen earlier in the year.
Cloud Growth Moderates Despite Earnings Beat
Microsoft guided fiscal third-quarter revenue to a range of $80.65 billion to $81.75 billion, with the midpoint matching analyst estimates. Its implied operating margin of 45.1%, however, fell short of the 45.5% consensus, reflecting heavier spending on AI computing capacity and talent.
Gross margin narrowed to just over 68%, the lowest level in three years. Capital expenditures and finance leases climbed 66% to $37.5 billion, exceeding analyst expectations of about $34.3 billion.
“All up, we added nearly one gigawatt of total capacity this quarter alone,” Chief Executive Officer Satya Nadella said on the company’s earnings call, citing rapid expansion of data centers to support AI workloads.
OpenAI Exposure and AI Spending Shape Outlook
A key driver of investor concern was Microsoft’s growing reliance on OpenAI. Commercial remaining performance obligations, a measure of contracted future revenue, surged to $625 billion, up about 110%. Microsoft said 45% of that backlog is tied to OpenAI, following a $250 billion cloud commitment during the quarter.
“The backlog is really good, but the disclosure that OpenAI is 45% of their backlog raises questions about concentration risk,” Jefferies analyst Brent Thill said on CNBC. “It comes down to whether OpenAI can meet its long-term financial commitments.”
Chief Financial Officer Amy Hood sought to reassure investors, calling the remaining backlog “larger than most peers, more diversified than most peers.” She said Microsoft remains OpenAI’s “provider of scale” and added that customer demand continues to exceed available supply.
Microsoft shares slide also reported $9.97 billion in other income, compared with a $2.29 billion expense a year earlier, reflecting a dilution gain after OpenAI restructured its for-profit arm.
Copilot Adoption Grows as PCs and Gaming Lag
The Intelligent Cloud segment generated $32.91 billion in revenue, up nearly 29% and above expectations. Productivity and Business Processes revenue rose 16% to $34.12 billion, driven by Office, LinkedIn, and Dynamics.
Microsoft disclosed for the first time that it has more than 15 million paid seats for its Microsoft 365 Copilot AI add-on. The company has over 450 million paid commercial Microsoft 365 seats, highlighting room for further adoption.
More Personal Computing revenue declined three percent to $14.25 billion, missing estimates. Gaming revenue fell 9.5% after the company recorded an impairment charge, while PC market growth failed to translate into higher Windows sales.
Microsoft shares slide are down about 11% over the past three months, lagging the broader market as investors weigh the costs and returns of the company’s aggressive AI investments.
