Microsoft’s greatest transformation story used to revolve round cloud computing.
By migrating enterprises from on-premise software program to subscription companies and hyperscale infrastructure, the Redmond, Washington-based tech big in lots of senses rewired company infrastructure from the ground-up, or the cloud-down.
But when Microsoft’s second quarter fiscal 2026 earnings name Wednesday (Jan. 28) is any indication, the corporate’s newest transformation story now revolves round synthetic intelligence (AI).
“We’re solely originally phases of AI diffusion and already Microsoft has constructed an AI enterprise that’s bigger than a few of our greatest franchises We’re pushing the frontier throughout our whole AI stack to drive new worth for our clients and companions,” Satya Nadella, chairman and CEO of Microsoft instructed buyers, in keeping with the earnings launch.
The clearest sign of Microsoft’s AI technique appeared in its Clever Cloud section. Income there rose 29% 12 months over 12 months to $32.9 billion, with Azure and different cloud companies rising 39% in reported phrases. Whereas Microsoft doesn’t get away AI income explicitly, Azure has turn out to be the first supply mechanism for large-scale AI workloads, from coaching basis fashions to deploying inference at enterprise scale.
“Microsoft Cloud income crossed $50 billion this quarter, reflecting the sturdy demand for our portfolio of companies,” Amy Hood, Microsoft government vp and CFO, mentioned within the earnings launch.
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The corporate’s general reported income for the second quarter reached $81.3 billion, up 17% 12 months over 12 months, whereas Microsoft’s working earnings climbed 21% to $38.3 billion.
Regardless of topping analyst estimates, the tech agency’s share value fell mid-single-digits in after-hours buying and selling on account of issues round AI-driven capital expenditures, which had been up 66% for the quarter.
Requested concerning the motion through the investor Q&A, each Nadella and Hood harassed that the short-lived belongings, primarily GPUs and CPUs, are “already offered for his or her whole helpful life.”
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Microsoft’s AI Benefit Is No Longer Theoretical, Nor Is it Low-cost
As executives instructed buyers in response to questions on capital expenditures, the reason being that Microsoft is aiming to regulate the total AI stack. Azure is not only renting GPUs; it’s more and more bundling mannequin entry, orchestration instruments, safety and governance right into a single enterprise-ready atmosphere. This reduces friction for purchasers who need AI capabilities with out managing fragmented vendor relationships.
The result’s a flywheel: AI demand drives Azure utilization, which in flip justifies additional infrastructure funding, reinforcing Microsoft’s scale benefit.
Microsoft’s 110% improve in industrial remaining efficiency obligation, which now stands at $625 billion, underscores how sticky this demand has turn out to be. Enterprises should not experimenting with AI on brief contracts; they’re committing to long-term capability.
Per the corporate’s financials, whereas Microsoft retains 80% of gross sales of OpenAI fashions to Azure clients, it retains a smaller share of its gross sales of Anthropic’s AI fashions.
Nonetheless, chasing AI management is dear. Microsoft’s stability sheet displays a dramatic growth in property and tools, with internet belongings rising to $261 billion. Money circulate from operations stays sturdy, however free money circulate is more and more formed by infrastructure funding choices that will take years to repay.
It was lined right here how Microsoft is a part of a small group of expertise giants anticipated to spend greater than $500 billion mixed on capital expenditures in 2026, largely pushed by investments in information facilities, chips and AI infrastructure. Microsoft’s capital expenditures together with belongings acquired below finance leases had been $37.5 billion for the newest quarter.
Coaching massive fashions requires huge capital expenditure in specialised {hardware}, whereas inference workloads create persistent, high-margin consumption over time.
The corporate continues to be early in what Nadella referred to as the diffusion part of AI, and diffusion favors platforms over level options. Microsoft’s capability to ship AI as infrastructure, utility and repair may place it favorably, and the corporate’s accelerating investments in information facilities sign confidence that demand for AI-driven compute could stay structurally greater than conventional cloud demand.
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Productiveness Reimagined
One typically missed side of Microsoft’s AI technique is governance. The corporate repeatedly emphasizes accountable deployment, safety and compliance not merely as moral commitments, however as industrial requirements. Massive enterprises and governments are unlikely to undertake AI at scale with out assurances round information safety, explainability and regulatory alignment.
That governance helps the corporate’s Microsoft 365 Productiveness and Enterprise Processes enterprise, the place income grew 16% to $34.1 billion for the quarter, pushed by sturdy efficiency throughout industrial and client cloud choices. Microsoft 365 Business cloud income elevated 17%, whereas client cloud income jumped 29%.
Dynamics 365 income rose 19%, reflecting how AI can be reshaping enterprise functions. Predictive forecasting, automated workflows and conversational interfaces are more and more desk stakes within the buyer relationship administration (CRM) and enterprise useful resource planning (ERP) methods that finance leaders use.
The PYMNTS Intelligence report “Sensible Spending: How AI Is Reworking Monetary Resolution Making” discovered that greater than 8 in 10 CFOs at massive corporations are both already utilizing AI or contemplating adopting it.
