Microsoft’s AI Engine Hits $37 Billion Run Rate as Azure Surprises and OpenAI Pact Gets a Rewrite

Microsoft's AI business reaches $37B annual run rate, Azure grows 40%, and Q3 earnings beat estimates as capex comes in below forecasts.

The numbers were supposed to be good, but they turned out better than anyone expected. Microsoft’s artificial intelligence business has reached an annualized revenue run rate of $37 billion, representing a 123% jump from a year earlier — a milestone that underscores just how quickly the company’s massive infrastructure bets are translating into actual sales.

The software giant reported fiscal third-quarter 2026 earnings that blew past analyst estimates on nearly every front. Revenue came in at $82.9 billion, up 18% year over year and comfortably ahead of the $81.4 billion consensus. Earnings per share landed at $4.27, topping expectations of roughly $4.05. Net income climbed 23% to $31.8 billion, while operating income rose 20% to $38.4 billion.

Azure Defies the Skeptics

The cloud segment, which includes Azure, generated $54.5 billion in revenue, a 29% increase. Azure itself grew 40% in constant currency — beating the company’s own guidance of 37% to 38% and silencing concerns that the cloud business was running out of steam. Those worries had been building after Azure decelerated from 40% growth a year ago to 39% in the prior quarter, prompting analysts to question whether the slowdown was temporary or structural.

Evercore’s Kirk Materne had argued that 38% or slightly above would be “good enough” given tough comparables. Guggenheim’s John DiFucci was more cautious, warning of a “mixed quarter” and flagging the risk that new business could disappoint. In the end, Microsoft delivered the upper end of its forecast and then some.

CEO Satya Nadella framed the results as evidence that the company’s infrastructure for “agentic computing” is gaining traction. The $37 billion AI run rate, he said, shows that the billions poured into data centers and GPU clusters over the past two years are now feeding the top line.

CapEx Comes in Below Forecasts

One of the quarter’s biggest surprises came on the spending side. Capital expenditures totaled $31.9 billion — well under the roughly $35 billion analysts had modeled. CFO Amy Hood attributed the lower figure to more efficient management of the pace of AI data center buildouts. That’s a notable shift from the prior quarter, when Microsoft spent $37.5 billion on capex, up 66% year over year, and the company was on track to hit roughly $100 billion in annual investment.

Bank of America had penciled in a more moderate $26.9 billion for the current quarter, which would still represent a 61% increase from a year ago. The actual number came in higher than that, but the fact that it missed consensus expectations helped ease investor anxiety about runaway spending.

The tension between operating leverage and free cash flow remains structural. Cloud gross margins held around 65%, and the company’s ability to keep that metric stable as new infrastructure moves from construction to utilization will be closely watched by margin-focused investors.

OpenAI Partnership Gets a Redesign

Just days before the earnings release, on April 27, Microsoft and OpenAI announced a sweeping restructuring of their relationship. The most significant change: Azure loses its exclusivity as OpenAI’s cloud provider. The AI startup can now distribute its products through Amazon and Google as well.

The financial flows have also been rewired. Microsoft will no longer pay a revenue share to OpenAI. Instead, OpenAI will continue to remit a 20% share of its revenue to Microsoft through 2030, though with an overall cap. Microsoft retains a non-exclusive license to OpenAI’s intellectual property through 2032. Azure remains OpenAI’s preferred cloud partner, but only as long as Microsoft can meet the technical requirements.

The market’s reaction to the deal has been mixed. Some see it as a strategic concession that dilutes Microsoft’s control over the most prominent AI startup. Others view it as a pragmatic move that removes a potential antitrust target and frees both companies to pursue their own growth paths.

Copilot Adoption Still Modest, But Momentum Is Building

Monetization of the Copilot AI assistant remains in early stages. Bank of America estimates roughly 15 million paid users, representing about 3.5% of the commercial Microsoft 365 base. A TD Cowen survey of nearly 700 decision-makers, however, found that 79% of M365 users plan to upgrade within the next 12 to 18 months — suggesting a significant pipeline of future revenue.

Leadership Shake-Up Adds Uncertainty

The quarter also brought organizational change. Following the departure of gaming chief Phil Spencer, Rajesh Jha — who oversaw the Office division for more than 35 years — is leaving the company. Four of his direct reports are being elevated to executive vice presidents reporting directly to Nadella. The flatter structure could improve decision-making speed, but it also introduces risk of friction as new reporting lines settle in.

Stock Under Pressure Despite Strong Results

Microsoft shares are trading at roughly €363, about 22% below their 52-week high and nearly 10% below the 200-day moving average. The stock has fallen roughly 10% since the start of the year. Options markets are pricing in a 7% move in either direction following the earnings release.

The market’s nervousness is understandable. After last quarter’s report, the stock dropped nearly 10% in after-hours trading despite strong numbers — because investors were focused on the outlook, not the rearview mirror. The fourth-quarter guidance and any signals about Azure’s trajectory will carry more weight tonight than comparisons to the prior year.

If the market interprets the OpenAI restructuring as a strategic win rather than a loss of control, and if Azure’s growth trajectory holds, the stock could reclaim its 100-day moving average of €366. But with the shares already down sharply from their highs, the bar for a sustained rally remains high.