Microsoft reports cloud costs surge

Microsoft’s fiscal third quarter showed that cloud demand is still accelerating, but serving that demand is getting more expensive. The company said on April 29 that Azure and other cloud services revenue rose 40% in the quarter ended March 31, while Intelligent Cloud revenue increased 30% to $34.7 billion. (microsoft.com) Total Microsoft Cloud revenue rose 29% to $54.5 billion. The same quarter also showed the cost of that growth. (microsoft.com) Microsoft said Intelligent Cloud cost of revenue increased $4.8 billion, or 47%, driven by investments in AI infrastructure to support customer demand and higher GitHub Copilot usage. Companywide, cost of revenue rose $4.9 billion, or 22%, and Microsoft Cloud gross margin percentage fell to 66% from 67% in the prior quarter and 69% a year earlier. (microsoft.com) ### Why did costs rise faster than cloud revenue? Microsoft said the main driver was capacity build-out. In its Intelligent Cloud segment disclosure, the company attributed the increase to investments in AI infrastructure supporting growing customer demand, alongside increased GitHub Copilot usage. (microsoft.com) Gross margin percentage in the segment declined because of those continued AI infrastructure investments, partly offset by efficiency gains in Azure. Amy Hood, Microsoft’s chief financial officer, said on the April 29 earnings release that the company exceeded expectations on revenue, operating income and earnings per share, while demand for Microsoft Cloud continued to grow. (microsoft.com) Satya Nadella, Microsoft’s chief executive, said the company was focused on delivering cloud and AI infrastructure and solutions in what he called the “agentic computing era.” ### Does this mean Azure demand is weakening? Azure’s reported growth suggests the opposite. Microsoft said Azure and other cloud services revenue grew 40%, driven by demand across the platform and continued growth across all workloads. Intelligent Cloud operating income still rose 24%, and gross margin in the segment increased $3.1 billion, even as margin percentage declined. (microsoft.com) Microsoft also reported that commercial remaining performance obligation, a measure of contracted future revenue, rose 99% to $627 billion. That figure indicates a larger backlog of business to be recognized over time, though Microsoft did not break out how much of that total was tied specifically to Azure infrastructure. (microsoft.com) ### Where is the margin pressure showing up? Microsoft said gross margin percentage decreased both at the company level and in the cloud business. The company attributed the decline to continued investments in AI infrastructure and growing AI product usage, partly offset by efficiency gains across Microsoft Cloud. Microsoft Cloud gross margin percentage was 66% in the quarter, down from 68% in the prior quarter and 69% in the year-earlier period, according to the company’s metrics page. (microsoft.com) The broader income statement still improved. Revenue rose 18% to $82.9 billion, operating income increased 20% to $38.4 billion, and net income rose 23% to $31.8 billion on a GAAP basis. (microsoft.com) That means the cost pressure is showing up as lower margin rate, not as an outright decline in profit dollars. ### What does Microsoft say comes next? Microsoft told investors on its April 29 earnings call that it expects fiscal fourth-quarter Intelligent Cloud revenue of $37.95 billion to $38.25 billion. The company also said it expects Azure revenue growth in the fourth quarter to be 39% to 40% in constant currency as it continues to accelerate capacity delivery and improve fleet efficiency. (microsoft.com) Microsoft’s next formal update on whether those investments keep outpacing revenue growth will come with its fiscal fourth-quarter results, after the quarter ending June 30, 2026. (microsoft.com 1) (microsoft.com 2)