Microsoft Spent $5 Billion Less Than It Planned and Grew Azure Faster. The Next Capex Wave Runs Through CPUs and Memory.

Thu, 29 Oct 2026 09:10:00 +0900

Microsoft reported its fiscal first quarter, which ended September 30, after the US close on October 28. Revenue was $92.3 billion, up 19%. Azure, disclosed in dollars for the first time, was $33.2 billion, up 48%. Capital spending including finance leases was $45.2 billion. In July, Microsoft had guided more than $50 billion. Microsoft 10-Q, CNBC, Oct 28

The shortfall was not a decision to spend less. CFO Amy Hood said some third-party capacity deliveries expected in the quarter were delayed. Microsoft said customer demand still exceeds supply. In extended trading the shares rose about 3–4%. CNBC reported about 4%, and a later Nasdaq after-hours print was about $545.60.

Our judgment: AI demand at Microsoft is limited by delivered capacity, not by budget, and the next leg of spending runs through CPUs and memory. Hood said second-half capex will accelerate mainly because of CPUs, including higher memory and storage costs, and GPUs. For Korean memory makers, that is a better read-through than another GPU-only wave. Conventional server DRAM and enterprise SSDs gain alongside HBM. The variable that now decides the 2027 memory cycle is the buyers’ cash flow, not their demand. Microsoft can pay. Not every hyperscaler can.

This article is dated October 29, 2026. Microsoft’s fiscal year ends on June 30. Call quotes come from a preliminary third-party transcript. AlphaStreet transcript

Five things to take away

Azure grew faster than capex. Azure revenue rose by $10.8 billion from a year earlier. Capex including finance leases rose by $10.3 billion. Azure grew 48%; capex grew about 30%.
The server share of capex jumped. About three quarters of capex went to short-lived assets such as servers, CPUs and GPUs, against about half a year earlier. That puts short-lived spending at roughly $34 billion, about double the $17 billion of a year ago.
Memory is now named as a cost driver. Hood said short-lived assets include higher memory and storage costs, and that the second-half acceleration is led by CPUs. Amazon said in July that most of its $20 billion capex increase reflected memory costs.
Microsoft also leases at scale. It has $364.6 billion of additional leases, mostly for datacenters, that have not yet commenced, more than Oracle’s $288 billion. Oracle 10-Q Its headline capex includes finance leases but not operating leases.
OpenAI is still a large share of the business. Microsoft recorded $10.0 billion of revenue from OpenAI in the quarter, about 11% of total revenue. That is a related-party disclosure in the 10-Q.

The quarter in numbers

Item	Q1 FY27	Change
Revenue	$92.28bn	+19%
Operating income	$45.92bn	+21%
Non-GAAP EPS	$4.89 (consensus about $4.73)	+18%
Azure revenue	$33.17bn	+48%
Microsoft Cloud revenue / gross margin	$63.9bn / 66%	+30% / lower
Commercial remaining performance obligation	$677bn, about 30% due in 12 months	+73%
Revenue from OpenAI, including revenue sharing	$10.0bn	related-party disclosure
Cash paid for property and equipment	$39.37bn	+103%
Capex including finance leases	$45.2bn (guide: more than $50bn)	about +30%
Operating cash flow / free cash flow	$58.0bn / $18.6bn	+29% / −27%
Windows OEM and devices revenue	$3.55bn	−22%

Sources: Microsoft 10-Q, Microsoft release, CNBC. Free cash flow is operating cash flow minus cash paid for property and equipment.

Microsoft also changed its segments this year. It now reports Agents and Infra, with revenue of $76.8 billion, up 25%, and Devices and Consumer, with $15.5 billion, down 3%. Older segment comparisons no longer apply.

AI demand: capacity-limited, broader, and still concentrated

Three facts describe demand at Microsoft today.

Demand exceeds supply, and the bottleneck is delivery. Microsoft fell about $5 billion short of its capex guide because third-party GPU capacity arrived late. The same delay pushes some third-party GPU-as-a-service revenue into the second half. Azure still grew 48%, helped by better GPU fleet efficiency, more use of idle CPU capacity and higher revenue per token. Hood said token pricing in the quarter was higher than Microsoft expected. For the December quarter, Microsoft guided Azure growth of 49–50% in constant currency, above the 45% consensus that CNBC cited.

Usage is broadening beyond chat. Nadella said Microsoft 365 Copilot daily users rose nearly 50% from the previous quarter and more than fivefold from a year earlier. Customers consuming Copilot credits rose more than 75% in the quarter. Foundry has more than 120,000 customers, and its revenue more than tripled. On GitHub, agents now open more than a third of pull requests. Microsoft did not update its paid Copilot seat count, tokens processed or an AI revenue run rate.

Concentration has not disappeared. Revenue from OpenAI was $10.0 billion, about 11% of the total. For scale, that equals about 30% of Azure revenue, but the two figures are not directly comparable, because Microsoft does not say how much of the OpenAI revenue is Azure. Receivables from OpenAI rose to $7.2 billion from $6.0 billion in June. Commercial bookings fell 12%, because the year-earlier quarter included very large Azure commitments. Remaining performance obligation still rose 73% to $677 billion. Nadella said Microsoft wants breadth. It may sell capacity to large buyers if the pricing is right. If not, it will be patient and build the breadth business.

Our reading: the demand signal is strong, and its quality is improving. The share coming from enterprise agents and developers is rising. The share that depends on one model company is still large enough to matter.

The capex path: about $170 billion this calendar year, then faster

Hood guided capex above $50 billion for the December quarter and about $170 billion for “the calendar year”. CNBC read this as calendar 2027. We read it as calendar 2026. In July, Microsoft guided calendar-2026 capex to about $175 billion, down from $190 billion after an accounting change to building lives. CFO Dive, Jul 30 On this call, Hood said “therefore” right after the December-quarter figure and gave the third-party delays as the cause of the lower number. The reported quarters from January to September 2026, about $31.9 billion, $41 billion and $45.2 billion including finance leases, plus a fourth quarter above $50 billion, add up to at least about $168 billion. A calendar-2027 total of $170 billion would also conflict with her guidance that spending accelerates from a base above $50 billion a quarter. The preliminary transcript does not name the year.

The composition matters more than the total. A year ago, about half of Microsoft’s capex was short-lived: servers, CPUs, GPUs and network gear. Now it is about three quarters. Land and buildings are moving into leases. Microsoft’s $364.6 billion of leases not yet commenced start between fiscal 2027 and fiscal 2034, with terms of up to 20 years. In the quarter, new operating-lease assets were $6.5 billion, against $1.4 billion a year earlier. Those operating leases are not in the $45.2 billion.

In other words, Microsoft’s own cash is increasingly going into the equipment inside the building. That is where memory sits.

The peer picture points the same way. Alphabet reported third-quarter capex of $51.4 billion on October 28, kept its 2026 range of $195–205 billion and said capex will increase significantly in 2027. Its shares fell more than 10% after hours. CNBC, Oct 28 Meta narrowed its 2026 range to $135–145 billion on October 21. Meta call transcript Amazon raised its 2026 plan to about $220 billion in July and attributed most of the increase to memory costs. Data Center Knowledge Amazon is scheduled to report after the US close on October 29.

Why CPUs matter for Korean memory

The market has treated AI memory as an HBM story. Microsoft’s guidance adds a second story.

Agents run on CPUs as well as GPUs. An agent that calls tools, searches, writes code and checks results spends much of its time on general-purpose servers. Microsoft said it is already monetizing idle CPU capacity and that second-half capex accelerates first because of CPUs. TrendForce made a related point on September 30: better server CPU availability is leading cloud providers and server makers to buy more general-purpose servers. TrendForce, Sep 30

Each general-purpose server carries conventional DRAM and SSDs. These are DDR5 server modules and enterprise SSDs, not HBM. TrendForce expects the pace of contract price increases to moderate, with conventional DRAM up 10–15% in the fourth quarter and NAND up 15–20%. Enterprise SSDs are the only category where increases are accelerating. It also says server DRAM remains undersupplied.

Memory is inflating capex itself. Microsoft named higher memory and storage costs inside its capex. Amazon attributed most of a $20 billion increase to memory. In April, before Amazon’s raise and Microsoft’s latest comments, a SemiAnalysis estimate reported by Tom’s Hardware put memory at about 30% of total hyperscaler capex in 2026. Tom’s Hardware This is the mechanism behind SK hynix’s 80% operating margin last quarter. KII, Oct 29

For Korean suppliers, the implication is specific.

Korean exposure	What Microsoft’s quarter implies
HBM (SK hynix, Samsung Electronics)	GPU capacity is still constrained and delayed into the second half; demand for accelerators stays strong
Conventional server DRAM (Samsung Electronics, SK hynix)	A CPU-led second half adds a second demand leg on top of HBM; contract prices are still rising
Enterprise SSD (SK hynix via Solidigm, Samsung Electronics)	Storage costs are named in Microsoft’s capex; enterprise SSD is the category where price increases are accelerating
Long-term agreements	SK hynix says agreements with 14 key customers cover more than half of its 2027–2028 capacity

Sources: Microsoft call; TrendForce, Sep 30; TheNextWeb on SK hynix Q3, Oct 28

Where the read-through can break

Two costs of the memory boom are already visible inside Microsoft’s own numbers.

Devices are paying for memory. Windows OEM and devices revenue fell 22%. CNBC tied the weakness to higher memory and storage costs that raised device prices. SK hynix itself flagged that PC and mobile shipments may fall because of memory costs. A memory cycle that is strong in servers and weak in consumer devices is more concentrated on a few cloud buyers.

The buyers’ cash flow is thinning. Microsoft’s operating cash flow rose 29%, but free cash flow fell 27% to $18.6 billion. CNBC reported that Alphabet’s free cash flow was negative in the quarter and that Meta’s turned negative. Microsoft said it remains free-cash-flow positive this fiscal year, has not yet tapped the debt markets for additional funding, and will use other funding sources when they are attractive.

This is where the memory thesis now lives. Demand for 2027 is well covered: SK hynix says its long-term agreements cover more than half of its capacity for 2027 and 2028, and on its call it cited market-research estimates that global cloud capex will grow more than 60% in 2027. The open question is how much more the buyers can pay when memory prices keep rising and their own free cash flow is near zero. Microsoft is the strongest payer in the group. Its acceleration is good news. A slowdown at the weakest payers would show up first in conventional DRAM and SSD orders, where long-term agreements are less common than in HBM.

Our judgment, and what would change it

The read-through for Korean memory is positive for 2027, and it is broader than HBM. Microsoft spent less than planned only because capacity arrived late, and it expects to spend faster in the second half on CPUs, GPUs and memory. The buyers’ cash flow dominates the next stage of the cycle, ahead of AI demand and supply. Demand is not the constraint today. Payment capacity could become one in 2027.

Evidence	What it would mean
Microsoft delivers December-quarter capex above $50bn	The delay was timing; the second-half acceleration is real
Amazon (Oct 29) and Alphabet (Q4 call) give 2027 capex growth of 30% or more	2027 memory demand is funded; conventional DRAM gains on top of HBM
TrendForce shows conventional DRAM contract prices still rising in 1Q27	The CPU leg is pulling through to memory prices
Two or more large buyers guide 2027 capex growth below 20%	Payers are pushing back on memory-inflated capex
Hyperscaler free cash flow negative for several quarters and new debt issuance rising	Payment capacity is the binding constraint; memory pricing power fades first in non-contract volumes
Windows OEM and phone declines deepen	Consumer demand destruction narrows the memory cycle to a few cloud buyers

The next checks are Amazon’s results after the US close on October 29 and Samsung Electronics’ full third-quarter results and call on the same day. Microsoft’s December-quarter capex, reported in late January, will show whether the delayed capacity arrived.

Do you see the CPU-led second half as a real second demand leg for conventional DRAM, or as a one-off catch-up of delayed deliveries? Tell us which number would convince you.

Research and information only; not investment advice. Estimates and scenarios are analytical assumptions, not company guidance, trade instructions or personalized portfolio decisions. Figures are date-bound. AI tools assisted research and editing.

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