Microsoft executives are expected to provide details on the memory crisis, Azure growth and Copilot usage.
The updated OpenAI deal. Updates on Microsoft Azure’s growth. And whether Copilot is growing in usage by Microsoft’s installed base.
These are some of the major subjects expected to come up when the Redmond, Wash.-based technology giant reports results for its third fiscal quarter Wednesday, covering the three months ended March 31. Cloud rivals and fellow hyperscalers Google and Amazon Web Services also report earnings Wednesday.
According to a report from KeyBanc this month, Microsoft Chairman and CEO Satya Nadella (pictured) and CFO Amy Hood could report total revenue of $81.2 billion for the quarter, up 15.9 percent year on year and below Wall Street’s $81.4 billion estimate. The investment firm also expects Microsoft 365 Commercial cloud to grow about 13.6 percent, same as Wall Street projections.
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5 Key Themes Ahead Of Microsoft’s Q3 Earnings
KeyBanc expects $15.5 billion in free cash flow, $3.9 billion above Wall Street’s forecast, with $37.2 billion in capital expenditures, above Wall Street’s $34.8 billion CapEx forecast for the quarter.
Microsoft 365 revenue should grow 15.1 percent year on year, according to a Bank of America report this month. Its productivity and business processes (PBP) segment, which includes M365, should grow 11 percent year on year.
Read on for what Microsoft’s 500,000-member partner ecosystem needs to know ahead of Microsoft’s latest quarterly earnings report.
Memory Costs, PC Demand Signal Channel Pressure
Microsoft’s earnings report could present a bellwether of sorts for how badly the memory crisis is hitting the channel.
A fourfold cost increase to memory and about double the cost of server-related hardware adds to Microsoft’s growing capital expenditures to meet AI demand, according to Morgan Stanley—not to mention the channel. The investment firm increased total Microsoft CapEx expectations in fiscal year 2026 by 2.1 percent, 2027 by 5.2 percent, 2028 by 5.3 percent and 2029 by 5.3 percent.
Pull-through PC orders by businesses looking to avoid higher prices in the future could help Microsoft this quarter, with Morgan Stanley reporting first calendar quarter shipments of about 64 million units, up 2.5 percent year on year and about 13 percent above initial estimates.
But 2026 should still end up a down year for PC shipments, with Morgan Stanley predicting 16 percent decline year on year. The investment firm has taken down its estimates for Microsoft’s “more personal computing” segment by 0.2 percent for fiscal year 2026, 2.9 percent for 2027 and 2 percent each for 2028 and 2029.
KeyBanc doesn’t expect as deep of an industrywide PC shipment decline, predicting 12.6 percent in 2026. The investment firm expects Microsoft’s Windows and devices revenue to fall about 10 percent year on year in the quarter, dragging the “more personal computing” segment that houses the business into a decline of 5.2 percent year on year, according to a report this month.
Windows and devices were about 5.5 percent of Microsoft revenue last quarter, according to KeyBanc.
Long-term growth drivers for Microsoft and its solution providers are continuing migration from Windows 10 to Windows 11 and premium AI PCs on the market, according to Morgan Stanley.
Azure Growth, AI CapEx Under Scrutiny
On Wednesday, analysts will look for signals that Microsoft’s Azure cloud business is showing positive growth trends even as the vendor invests in data center buildouts to meet increased AI demand from customers as well as its own internal use.
Microsoft should deliver about 39 percent Azure growth year on year in its third-quarter results, Morgan Stanley said in a report this month. Microsoft executives said to expect growth closer to 37 percent. The investment firm expects a fourth-quarter forecast in the low to mid 30s.
Holding Microsoft back from higher historical cloud growth is its strategy of allocating more compute capacity to, first, Microsoft 365 Copilot, GitHub Copilot and other first-party applications, followed by capacity allocation to frontier model innovation and other internal R&D projects, according to a TD Cowen report this month.
The investment firm put expected Azure growth at 38 percent year on year for the quarter, forecasting 36 percent growth in the fourth quarter, akin to Wall Street’s prediction.
Positive signs of Microsoft growing data center capacity to meet AI and cloud needs include the Fairwater data center in Wisconsin going live ahead of schedule, bringing together hundreds of thousands of GB200 AI chips. Microsoft has also partnered with more companies on capacity, including a deal announced earlier this month with Nscale for a project in Norway that was originally meant for OpenAI’s Stargate initiative, according to Bloomberg.
Microsoft could reveal CapEx spending of around $37.2 billion for the latest quarter on Wednesday, $2.6 billion above Wall Street expectations, KeyBanc said in a report Thursday. Wall Street expects $154 billion in CapEx beyond the quarter, $50 billion above the forecast a year ago and more than double the forecast two years ago.
Microsoft 365 E7 Nears GA
Microsoft’s latest earnings report comes as the vendor and its solution providers prepare for its new Microsoft 365 E7 license, which becomes generally available Friday.
Nicole Dezen, Microsoft’s chief partner officer and corporate vice president of global channel partner sales, told CRN in an interview that E7—alongside the Agent 365 agent control plane becoming GA on the same date—are enormous opportunities for solution providers looking to boost customers’ AI capabilities as well as their security posture. Microsoft also has a series of promotions planned to help partner E7 sales.
Partner customers have responded well to E7 so far, with Microsoft Entra Suite inclusion a needle-mover for the tools’ identity, network access and zero-trust capabilities that build on top of E5’s Entra ID P2 tier included in E5, according to a Morgan Stanley report this month.
E7 could help drive more standardized Copilot deployments and convert Copilot awareness into incremental usage, according to the investment firm.
The E7 bundle and Copilot Cowork, released in research preview in March, could help Copilot penetration go from about 4 percent this fiscal year to about 17 percent in Fiscal Year 2030, TD Cowen said in a report this month. E7 is priced at $99 and comes in at a discount of about 15 percent compared with purchasing the tools individually.
A survey by the investment firm showed that about 80 percent of Microsoft 365 users are either somewhat or very likely to upgrade their license within the next 12 to 18 months, and 75 percent of respondents said they see positive return on investment on AI agent products, with 87 percent satisfied or very satisfied with Copilot.
The new E7 licenses could also help migrations from E3 to E5—an activity handled by many Microsoft solution providers—because E7 takes some of the sting out of E5’s expected price increase to $60 in July. E5 might look more affordable compared to E7 for cost-conscious Microsoft customers, according to KeyBanc.
Copilot Adoption, AI App Momentum
At least one survey of VARs shows that Copilot adoption is growing, with KeyBanc’s latest showing that 45 percent of surveyed VARs saw most customers rolling Copilot into production, up 14 points from the prior quarter. Fewer VARs see customers just researching or experimenting with Copilot.
KeyBanc’s latest quarterly survey of VARs resulted in about 60 percent saying first-quarter results came in above plan, 22 points ahead of the prior survey and 27 points ahead year on year. About 85 percent of VARs said they expect increased spending in Azure as part of Microsoft bills, and 65 percent said the same of GenAI, according to the investment firm. In security, 35 percent of surveyed VARs said they expect increased spending.
So far, Copilot’s paid seat count has lagged expectations, last month only reaching about 3 percent of the overall M365 commercial user base, according to KeyBanc. That comes to 15 million paid Copilot seats compared with more than 450 million overall commercial seats almost three years after Copilot’s launch.
About 80 percent of CIOs surveyed by Morgan Stanley said they plan to use Microsoft 365 Copilot in the next 12 months, up from 72 percent reported in the survey for 2025’s second quarter, according to the investment firm. That’s the fifth consecutive sequential increase of CIOs leveraging Microsoft’s M365 Copilot AI capabilities.
Copilot penetration estimates could go from about 2.5 percent in fiscal year 2025 to 4.5 percent in 2026, 6.5 percent in 2027, 9.5 percent in 2028, 13 percent in 2029 and 17 percent in 2030, according to TD Cowen’s report this month.
The investment firm expects total seat growth to moderate from about 6 percent year on year in fiscal year 2026 to about 4 percent in fiscal year 2030, but Copilot raises the average revenue per user, driving a durable 15 percent Office 365 commercial cloud revenue growth.
Copilot revenue should reach about $4.6 billion in fiscal year 2026, more than double year on year, according to TD Cowen. The investment firm expects the revenue to grow 73 percent to $8 billion in 2027, 54 percent to $12.3 billion in 2028, 45 percent to $17.8 billion in 2029 and 39 percent to $24.6 billion in 2030.
CIOs expect 36 percent of their organization to use Copilot in the next 12 months, up from 31 percent in that 2025 survey and up from 17 percent in 2024’s fourth quarter, according to Morgan Stanley. CIOs expect 61 percent of their organization to leverage Copilot in the next three years, a significant increase from 43 percent in that 2025 survey and 28 percent in that 2024 survey.
Judson Althoff, named Microsoft’s commercial CEO in October, told Microsoft employees in an internal meeting that Copilot sales hit “some pretty big audacious goals” in the quarter and was “materially ahead” of January’s paid Copilot subscription results, Bloomberg reported earlier this month. This marked a shift from driving free Copilot adoption for existing customers.
What Microsoft’s New OpenAI Agreement Means
Analysts on Wednesday will likely seek more details on Microsoft’s new licensing and revenue share agreement with OpenAI.
The two companies revealed this week that they revised their partnership so that Microsoft, in part, no longer pays a revenue share to the ChatGPT maker, Microsoft no longer has an exclusive license to OpenAI intellectual property and OpenAI can serve all products to customers across any cloud provider.
For solution providers, the greater flexibility by both companies comes as OpenAI appears to be building out its own channel partner program, making moves like hiring former Google and Snowflake channel executive Colleen Kapase and naming solution provider giants Accenture, Capgemini, CGI, Cognizant, Infosys, PwC and TCS as partners to help scale its Codex product.
Solution providers who are not OpenAI partners have told CRN that they see opportunities with Codex should OpenAI explore a broader channel strategy beyond working with large-size solution providers.
The deal should help with OpenAI’s quest to become publicly traded because it can now spend with Microsoft cloud rivals including Amazon Web Services, Google Cloud and Oracle, Wedbush said in a report Monday.
Microsoft loses exclusivity for OpenAI, but the technology giant is already at work innovating around its Copilot AI assistant, developing its own models and leveraging models from OpenAI rivals including Anthropic, according to the investment firm. Microsoft also sets the stage for getting all revenue generation on its core platform.
Microsoft should still capture more than $280 billion in Azure AI revenue from OpenAI over the next five to 10 years, Bernstein said in a report Monday.
TD Cowen’s report Tuesday estimated that Microsoft shared 20 percent of Azure OpenAI Services revenue with the AI startup, which should mean an extra $700 million for Microsoft in fiscal year 2026, $1.3 billion the following year, then $2.3 billion, $3.7 billion and finally $5.1 billion it would have otherwise paid OpenAI, totaling more than $13 billion through fiscal year 2030. The investment firm estimates an extra 1 percent to percent boost to Azure total growth in fiscal year 2027.
