Dive Brief:
- Microsoft is hitting its stride with enterprise adoption of its 365 Copilot tool, boosting capital expenditures to match rising demand for AI services, executives said Wednesday during an earnings call for the company's Q3 2026.
- “Quarter over quarter, we continue to see acceleration and now have over 20 million Microsoft 365 Copilot paid seats,” CEO Satya Nadella told analysts during the call. “The number of customers with over 50,000 seats quadrupled year over year.”
- CFO Amy Hood said the company’s annual revenue run rate for its AI business grew 123% year over year, surpassing $37 billion. AI represented a sizable portion of the company’s overall Q3 revenue, which grew 18% to reach $82.9 billion.
Dive Insight:
Hyperscalers have aggressively pursued enterprise AI spend, pouring billions to expand capacity and hoping for a quick return on their investments. So far, the numbers show the bet is paying off.
In line with the demand boost, Microsoft increased its capital expenditures for the following quarter, mainly in support of expanding its compute capacity. In Q3, the company said capital expenditures totaled $31.9 billion. It plans to surpass $40 billion next quarter, citing a $5 billion boost related to higher component pricing and the impact from finance leases.
“We added another gigawatt of capacity this quarter and remain on track to double our overall footprint in just two years,” Nadella said. “We are moving aggressively to add capacity aligned to our demand signals we see and we have announced new data center investments across four continents.”
All told, Microsoft is expecting $190 billion in capital expenditures during the current calendar year, matching Alphabet's projections and falling just shy of Amazon's $200 billion target.
Despite the massive growth spurt, the cloud market is expected to continue to expand, bolstered by new use cases, according to John Dinsdale, chief analyst at Synergy Research Group.
“The year-on-year growth rate increased for the ninth successive quarter, reaching 35%,” Dinsdale said in an emailed statement. “That is the highest growth rate seen since the last quarter of 2021, when the market was only 40% of its current size.”
During the earnings call, Microsoft executives referenced the updated terms of its partnership with OpenAI, a shift unveiled on Monday that broke the model provider free from Microsoft exclusivity while keeping Azure as the primary provider of compute. A day later, OpenAI announced that it was bringing its models to AWS.
“Overall, we feel good about our partnership with OpenAI,” Nadella said. “We have a frontier model, royalty-free, with all the IP rights that we will have access to all the way to [2032], and we fully plan to exploit it.”
As CIOs navigate the shifts in the vendor market, they must closely evaluate the strengths and drawbacks of each provider, said Olivier Blanchard, research director and practice lead for intelligent devices at The Futurum Group.
“If our strategy relies on the stack, Microsoft is still probably your best bet,” Blanchard said. “If your workforce is already using Copilot, for instance, and your data is in Microsoft Fabric, Azure is going to offer the lowest friction for AI adoption.”
However, Google Cloud stands out from the provider landscape in terms of its technical capabilities while AWS offers greater vendor neutrality, according to Blanchard.
“CIOs shouldn’t necessarily commit to just one provider in the hopes that it will serve the needs of their entire organization, but rather engage each vendor tactically based on each general use case,” Blanchard said.
