Bank of America: Microsoft Azure growth beats expectations as computing efficiency temporarily offsets delivery delays

How much did Azure growth beat expectations by?

In the first quarter of fiscal 2027, Azure revenue grew 48% year over year at constant currency, approximately 3 percentage points above Bank of America's forecast. Microsoft's second-quarter growth guidance of 49%–50% exceeded market expectations of 45%.
The company's total revenue for the quarter was 92.3 billion dollars, up 19% year over year at constant currency, above market expectations of 17%. Its operating margin was 49.7%, about 1.4 percentage points above expectations, helped by accelerating revenue, improved cloud efficiency and selective spending.

Delivery delays at some third-party suppliers have pushed some new capacity into the second half of fiscal 2027. Microsoft is generating more revenue from existing infrastructure by improving GPU and CPU efficiency: the time from server delivery to deployment fell 20% quarter over quarter, and available CPUs were allocated to queued traffic more quickly.
Management still expects capacity at the end of fiscal 2027 to be twice its level at the end of fiscal 2025. However, it expects Azure growth to slow in the second half because of persistent supply constraints and a higher year-earlier comparison base. The year-over-year boost from efficiency gains will weaken as the comparison base changes, and pricing benefits from new models will also diminish as prices fall.

Copilot revenue grew quarter over quarter, and daily active users rose nearly 50% from the prior quarter. The number of customers with more than 50 thousand seats rose to over 8 times its year-earlier level, while the number actively consuming Copilot credits increased by more than 75% quarter over quarter. Bank of America believes larger deployments and usage-based billing can increase revenue per user.
On the platform side, Foundry revenue more than tripled year over year, with over 120 thousand customers; revenue from open-source models rose to 10 times its year-earlier level. Microsoft therefore earns revenue from use of both its applications and its model platform.

First-quarter operating expenses rose 6% year over year, below the 19% increase in revenue. However, as Azure's share increased, cloud gross margin fell year over year to 66%. Devices and consumer revenue fell 3% year over year to 15.5 billion dollars, including a 22% decline in Windows OEM and devices revenue.
First-quarter operating cash flow rose 29% year over year to 58 billion dollars, and free cash flow was 18.6 billion dollars. Bank of America expects capital expenditure of approximately 125 billion dollars in the second half of fiscal 2027, as delayed capacity is delivered and component prices rise, versus approximately 96 billion dollars in the first half. It expects approximately 222 billion dollars for the full year, up 53% year over year.
Bank of America expects free cash flow of 37.1 billion dollars in fiscal 2027, down 44.6% from 67 billion dollars in fiscal 2026, although management still expects positive free cash flow for the full year. Bank of America raised its fiscal 2027 earnings-per-share forecast from 19.70 dollars to 20.02 dollars, maintained its buy rating and raised its price target from 600 dollars to 630 dollars.