{"slug": "ai-dominates-the-microsoft-conversation-but-not-the-companys-business", "title": "AI Dominates The Microsoft Conversation, But Not The Company’s Business", "summary": "Microsoft Corp. reported fiscal 2026 fourth-quarter revenue of $90 billion, up 17.7 percent year over year, with net income of $35.77 billion, up 31.3 percent, as the company spent $145.3 billion on capital expenses in fiscal 2026 and plans $190 billion in fiscal 2027. Azure cloud revenues grew 64 percent to an estimated $31.91 billion, and Copilot seats rose to 30 million from 20 million three months earlier, while Microsoft's market capitalization reached $3.44 trillion.", "body_md": "# AI Dominates The Microsoft Conversation, But Not The Company’s Business\n\nFor those of us who grew up watching Microsoft DOS on X86 PCs transform into the Windows Server platform along with applications, databases, and middleware, the modern Microsoft – a cloud innovator and an AI force in its own right – is a behemoth to behold. The financial results just sound silly, with market capitalization in the trillions and revenues in the hundreds of billions.\n\nThis may all sound like funny money, but its real money and there is nothing funny about it. Microsoft is a credible alternative to Oracle in applications and middleware, is nipping at the heels of Amazon Web Services in the cloud racket, and is now partnering broadly to bring all manner of AI models to bear through its own services as well as through the Azure cloud. In a world where size most assuredly matters – only the rich can steer AI because it requires so much expensive hardware to advance the state of the art – Microsoft is big enough to control its own fate. And as the fourth quarter results for fiscal 2026 show, Microsoft is investing in the AI future without going overboard, an attitude that Wall Street appreciates.\n\nNot that the numbers are still not huge, unprecedented even. In fiscal 2026, Microsoft spent a $145.3 billion on capital expenses, and about two-thirds of that was for CPU and GPU in clusters and about a third was for datacenter facilities and other long-lived assets. Looking ahead to fiscal 2027, Microsoft said that it was standing pat with $190 billion in capital expenses, and not increasing its spending like many of its cloud and hyperscale peers. Coupled with an increase in Copilot use to 30 million seats, up from 20 million only three months ago, and a steady rise is Azure cloud revenues, Microsoft had its week on Wall Street ever and now has a market capitalization of $3.44 trillion.\n\nMicrosoft’s application software business for both PCs and servers – what it calls its Productivity and Business Processes group – had $37.85 billion in sales in fiscal Q4, up 14.3 percent year on year and delivering $21.9 billion on operating income. That is 57.9 percent of revenues, which is pretty good.\n\nThe Intelligent Cloud business, which includes the Windows Server stack for on premises workloads as well as the Azure cloud infrastructure and systems software for running inside of virtual machines on the cloud, had $39.31 billion, up 31.6 percent. Because of the high cost of infrastructure, operating income was only 40.6 percent of revenues, just a tad under $16 billion. The More Personal Computing group, which sells PC software and devices, booked $12.85 billion in revenues, down 4.4 percent and had operating income of only $2.75 billion, or 21.4 percent of revenues.\n\nMicrosoft had $17.23 billion in product sales, up six-tenths of a point, while services revenues drove $72.77 billion, up 22.7 percent. Total revenue was up 17.7 percent to just a hair over $90 billion, with overall operating income up 18.3 percent to $40.6 billion and net income up 31.3 percent to $35.77 billion.\n\nThe software and cloud giant exited the quarter with $76.84 billion in cash and equivalents and blew $41 billion on capital expenses, again with about two-thirds of it on systems for Azure and the rest for datacenters and other facilities.\n\nThe broad category called Microsoft Cloud, which is any PC or server software running in the cloud with utility pricing, accounted for $59.3 billion in sales, up 27 percent, with a gross profit of $38.55 billion, up 21.4 percent and comprising 65 percent of those cloudy revenues.\n\nIn terms of the purely cloud infrastructure utility known as Azure, my model pegs revenues of $31.91 billion, up 64 percent, and I further estimate operating income for Azure at $13.93 billion, about 43.6 percent of those revenues and up 68.8 percent year on year. This is a tough but good hardware business. OEM and ODM server makers wish to heaven above that their hardware businesses could be anywhere near as large or profitable as Azure is.\n\nMicrosoft said that in fiscal 2026, the overall Azure business broke through $100 billion for the first time.\n\nWhich brings me to the part I always like to get to when doing financial analysis: What is the “real” systems business of any of the companies that are tracked by *The Next Platform*?\n\nIn Microsoft’s case, this is the baseline Azure cloud infrastructure business (IaaS) plus the on premises Windows Server business, and my model suggests that this real systems business was steady freddie in Q4 F2026, with sales up three-tenths of a point to just a tad over $22 billion, with an operating income of $8.94 billion, of 40.6 percent of revenues. This is one of the largest systems businesses that has ever been built in history, rivaling IBM at its peak when it was still selling X86 servers more than a decade ago.\n\nOne of the things that is very important when looking at Microsoft these days is the revenue backlog, which is comprised mostly of Azure contracts that stretch out into the future and which has AI model builder OpenAI as a major contributor. Here is what the backlog situation looks like as fiscal 2026 came to a close:\n\nAs Q4 came to a close, Microsoft had a $678 billion – that is billion with a “b” – backlog. Microsoft did not provide a separate backlog for OpenAI this time around, but you can back into it because Microsoft did say that the non-OpenAI part of the backlog grew by 25 percent. If you do the math on the historical data, then OpenAI still has $255.1 billion of capacity contracted from Microsoft, and that leaves $422.9 billion from other customers for all kinds of Microsoft goods and services.\n\nAnd finally, that leaves the annualized annual run rate for the AI business at Microsoft, which is going to get increasingly hardware to extract from all of the groups, divisions, and product lines. Microsoft did not provide a figure for this time around so we made estimates as is our habit.\n\nI reckon that the AI ARR was about $44.5 billion in Q4 F2026, a little more than double from the year ago period. Such an ARR means that in Q4 itself, Microsoft posted actual AI revenues of $11.13 billion, which is 12.4 percent of the company’s revenue. Two years ago, the AI business at Microsoft was five times smaller.\n\nIt may feel like AI is dominating the conversation, but AI is nowhere near dominating the Microsoft business. That day will come, of course, just like it did for cloud computing.", "url": "https://wpnews.pro/news/ai-dominates-the-microsoft-conversation-but-not-the-companys-business", "canonical_source": "https://www.nextplatform.com/cloud/2026/07/31/ai-dominates-the-microsoft-conversation-but-not-the-companys-business/5281992", "published_at": "2026-07-31 18:23:11+00:00", "updated_at": "2026-07-31 18:24:19.022316+00:00", "lang": "en", "topics": ["artificial-intelligence", "ai-infrastructure", "ai-products"], "entities": ["Microsoft Corp.", "Azure", "Copilot", "Amazon Web Services", "Oracle"], "alternates": {"html": "https://wpnews.pro/news/ai-dominates-the-microsoft-conversation-but-not-the-companys-business", "markdown": "https://wpnews.pro/news/ai-dominates-the-microsoft-conversation-but-not-the-companys-business.md", "text": "https://wpnews.pro/news/ai-dominates-the-microsoft-conversation-but-not-the-companys-business.txt", "jsonld": "https://wpnews.pro/news/ai-dominates-the-microsoft-conversation-but-not-the-companys-business.jsonld"}}