Microsoft reported fiscal third-quarter results that exceeded consensus expectations on both revenue and earnings, underscored by continued strength in its AI-driven businesses. The company posted EPS of $4.27 on revenue of $82.9 billion, ahead of Bloomberg consensus estimates of $4.04 and $81.5 billion, respectively.
A key highlight for investors was the scale of Microsoft’s AI platform: management indicated its AI business has reached a $37 billion annualized revenue run rate, representing 123% year-over-year growth. Adoption trends remain robust, with Copilot surpassing 20 million paid seats, up from 15 million in the prior quarter.
Despite the beat, shares of Microsoft (MSFT) traded modestly lower in after-hours activity, suggesting elevated expectations and potential investor sensitivity to forward-looking dynamics.
Earlier in the week, Microsoft also updated the market on changes to its strategic partnership with OpenAI. The revised agreement removes Microsoft’s obligation to share revenue with OpenAI, while OpenAI will continue to make payments to Microsoft. However, the relationship is becoming less exclusive: OpenAI will have greater flexibility to distribute its models across multiple cloud providers, and Microsoft no longer retains exclusive access to its intellectual property.
From a segment perspective, performance was broadly constructive. Productivity and Business Processes revenue came in at $34.7 billion, slightly ahead of expectations, while Intelligent Cloud generated $34.68 billion, also exceeding consensus. The More Personal Computing segment delivered $13.2 billion, benefiting from relative resilience in PC demand despite industry headwinds.
Contracted backlog remains a notable area of strength. Remaining performance obligations (RPO) increased 99% year over year to $627 billion, reflecting sustained enterprise demand, though growth moderates to approximately 26% when excluding OpenAI-related contributions—more consistent with historical trends.
Capital expenditures totaled $31.9 billion for the quarter, with roughly two-thirds allocated to long-lived assets such as GPUs and CPUs, highlighting ongoing infrastructure investment to support AI and cloud growth.
On the margin, the broader PC market continues to face pressure from a global memory shortage tied to accelerated data center buildouts, contributing to higher device pricing and a shift away from lower-end models. Industry forecasts point to a double-digit decline in global PC shipments this year, reinforcing a mixed demand backdrop for hardware-linked segments.
Overall, while Microsoft’s fundamentals remain strong—particularly in AI and cloud—market reaction suggests investors are increasingly focused on competitive dynamics in AI partnerships and the sustainability of outsized growth rates.
