Microsoft Enters New Fiscal Quarter: 5 Channel Takeaways

Microsoft may not be showing enough AI and cloud business growth to justify its spending for Wall Street, but solution providers have plenty of signals for long-term growth in those spaces.

Some disappointing results in Microsoft’s cloud business for the latest quarter and the recent announcement by Anthropic, the maker of artificial intelligence tool Claude, that it is open-sourcing plugins for a variety of vertical-focused enterprise software helped eviscerate stocks for a variety of publicly traded technology companies—but for solution providers looking to ride the AI wave, multiple signals from Microsoft still point to the longevity of the AI era.

Despite Wall Street analysts beating up the Redmond, Wash.-based technology giant for high amounts of capital expenditure spending not translating yet into major revenue growth across Microsoft’s AI and cloud portfolio, new growth milestones in Copilot, Foundry, Fabric and other Microsoft products put the vendor and its ecosystem of more than 500,000 partners on strong footing as Microsoft and its channel move further into the vendor’s third fiscal quarter.

Microsoft’s stock is down about 15 percent since it reported results for its second fiscal quarter last week, and The Wall Street Journal reported Tuesday that the current selloff has software and data stocks about $300 billion.

Microsoft Third Quarter

SAP and ServiceNow also disappointed Wall Street with their results last week—according to multiple published reports by investment banks and are part of the tech stock decline with SAP’s stock falling about 17 percent since Wednesday, ServiceNow’s stock falling about 11 percent. Even technology companies that haven’t reported their latest quarterly results yet are getting hit, with Oracle falling about 10 percent and Salesforce falling about 14 percent since Wednesday.

Still, the selloff is an important reminder that what happens in the public market doesn’t necessarily reflect what happens in the channel, as evident with the new milestones reached in a variety of products partners resell and work with.

Multiple investment banks traced the current tech selloff to Anthropic saying it will open-source plugins for a variety of verticals from document reviews and other legal work, customer support, finance and even biology research, a sign that AI upstarts are not just infrastructure for the AI era and can externalize and productize agentic capabilities to compete with traditional enterprise software vendors in markets they hold dear, KeyBanc said in a report Tuesday.

The investment firm still put Microsoft among the companies with avenues where AI workload growth can improve fundamentals, including Oracle and Akamai Technologies.

Microsoft Chairman and CEO Satya Nadella has put down the importance of SaaS in the age of AI, and the fear companies like Anthropic and ChatGPT maker OpenAI stoke for the markets they could invade might bring to mind the handwringing that goes on when the hyperscalers of Microsoft, Amazon and Google turn their attention to a new part of the technology stack to conquer.

For the current fiscal quarter, Microsoft expects revenue of $80.65 billion to $81.75 billion, growth of 15 percent year on year to 17 percent, and encapsulating the $81.23 billion Wall Street expected Microsoft to announce.

The vendor said to expect Azure growth year on year to stay flat at 38 percent or even decelerate to 37 percent—although that would still mark four consecutive quarters of Azure growth in the high 30s, not a bad milestone, according to a KeyBanc report Wednesday.

Read on for more takeaways from the channel on Microsoft’s positioning across a variety of technologies as it enters the third quarter of its fiscal year.

Growing Usage Across AI, Data Portfolio

Although Microsoft forecasts flat or even decelerated growth in some of its AI and cloud business segments this quarter, a variety of growth milestones in Microsoft’s AI, cloud, security and data portfolio point to the long-term health and durability of Microsoft’s AI business and even its business that doesn’t necessarily touch AI.

As an example of the new growth milestones Microsoft has hit, the vendor now has 1,500 customers that have used Anthropic and OpenAI models on Microsoft’s Foundry AI application and agent factory. The number of customers spending $1 million-plus per quarter on Foundry grew nearly 80 percent, driven by strong growth in every industry. More than 250 customers are on track to process over 1 trillion tokens on Foundry this year, according to Microsoft.

Looking at Fabric, the data analytics platform’s annual revenue run rate is now more than $2 billion with more than 31,000 customers in two years into its broad availability. Fabric is the fastest-growing analytics platform on the market with revenue up 60 percent year over year, according to Microsoft.

In the Copilot AI chatbot and virtual assistant, daily users of the Copilot application nearly tripled year over year. Microsoft 365 Copilot’s average number of conversations per user doubled year over year, and daily active users increased tenfold year over year.

M365 Copilot seat adds saw a record quarter, more than doubling year on year and now has 15 million paid seats with “multiples more” enterprise Chat users. That could mean a $3 billion-plus run rate in the business depending on volume discounts, according to Morgan Stanley. The investment firm also noted that the M365 Commercial user base exceeds 450 million. The number of M365 Copilot customers with more than 35,000 seats tripled year over year in another example of growth.

Good news for Microsoft solution providers is the multiplier effect and cross-selling potential across the Microsoft portfolio. Foundry users, as an example, use additional Azure solutions like developer services, app services and databases as they scale, Nadella said on the latest quarterly earnings call.

To put numbers to the flat or decelerating growth forecast Microsoft has laid out, it expects the productivity business processes segment—which includes its productivity applications like Word, Excel and Teams, all receiving new AI capabilities—to deliver revenue of $34.25 billion to $34.55 billion, growth of 14 percent to 15 percent and above the $33.74 billion Wall Street estimated.

Within this segment, the Microsoft 365 Commercial cloud growth year on year should stay flat at 14 percent or even decelerate to 13 percent, according to Microsoft. The 14 percent growth year on year reported in the latest quarter was itself a deceleration from 15 percent the prior quarter and a year ago, according to KeyBanc.

M365 Commercial product revenue should decline in the low single digits, down sequentially, assuming Office 2024 transactional purchasing trends normalize, according to the vendor. The Dynamics 365 suite of business applications should grow in the high teens.

CIO interest in Copilot is a long-term opportunity, according to Morgan Stanley’s latest quarterly survey of the community. The investment firm found that 80 percent of CIOs use or expect to use M365 Copilot in their organizations in the next 12 months, up from 72 percent in the second quarter of 2025. The depth of penetration is expected to reach 36 percent of users in the next 12 months, up from 31 percent in the prior survey.

Microsoft Security Gains

Although Microsoft has plenty of rivals in the third-party security space, the vendor’s first-party security business—which many partners participate in—also enters the new fiscal quarter with new milestones reached across the portfolio.

Microsoft now has 1.6 million security customers, including more than 1 million who use four or more workloads. The Purview unified data governance, risk and compliance product audited 24 billion Copilot interactions, up ninefold year over year.

Just as AI can provide a multiplier effect for solution providers’ traditional Microsoft business, attaching security products to a customer’s Microsoft spend is also a revenue multiplier driver for solution providers that are experienced in security.

Building Azure, AI Capacity

Azure’s 38 percent Azure growth year on year may have disappointed some analysts on Wall Street—and Microsoft forecasting flat or even decelerating growth in the business in the current fiscal quarter—but the vendor pointed to plenty of signs of long-term success awaiting this business segment and the solution providers that work in it.

Microsoft CFO Amy Hood even said on the latest quarterly earnings call that Azure would have actually exceeded 40 percent growth year on year if not for Microsoft allocating some of its GPUs for Copilot and internal research, which can take precedence over external Azure users.

The vendor is hard at work adding supply as well to try to meet the growing AI and cloud demand, with 1 gigawatt of total capacity added during the latest quarter.

The broader Microsoft Cloud business, representing 63 percent of Microsoft’s revenue, grew 24 percent year on year and showed sustaining momentum in the commercial business, William Blair said in a report. Microsoft also saw healthy Copilot adoption and license upselling to the more expensive E5, both activities that involve solution providers.

Although AI remains one of the biggest customer opportunities for solution providers, bread-and-butter cloud migrations remain a channel driver, with Nadella pointing to the new SQL Server more than doubling the IaaS adoption of the previous version.

The “intelligent cloud” segment—which includes Azure—should see revenue of $34.1 billion to $34.4 billion this quarter, up 27 percent to 29 percent and also above Wall Street’s $33.81 billion estimate. Within this segment, Azure revenue should grow 37 percent to 38 percent, according to Microsoft.

Some other positive signs of a diversified Azure business—not just one dominated by a handful of AI upstarts—was Microsoft’s commercial remaining performance obligation growing 28 percent to $340 billion ignoring contributions from ChatGPT maker OpenAI. The weighted average duration of Azure contracts expanded from two years to two and a half thanks to longer-term Azure deals. Microsoft expects 25 percent of that RPO to get recognized as revenue in the next 12 months.

AI Upstarts Will Have Trouble Overcoming Incumbents’ Data Troves

These early innings of the AI era, with technology companies still laying the tracks for the AI locomotive that will ultimately deliver value to end users, is resulting in semiconductor capital equipment companies like ASML and memory companies like Sandisk taking software vendors’ spot in beating Wall Street expectations on quarterly results, according to a William Blair report Monday.

ASML reported almost double the amount of new bookings Wall Street expected in its latest quarterly earnings, and Sandisk’s forecast for next quarter’s revenue came in 60 percent above Wall Street expectations.

Still, AI will ultimately be consumed by end users at the application layer owned by software companies including Microsoft, the investment firm said. William Blair predicts that enterprises look to leverage AI through existing systems of record and trusted vendors instead of ripping and replacing core platforms. If AI upstarts will disrupt any part of the technology stack, it’s in the point solutions and nice-to-have, non-mission-critical tools.

Traditional technology vendors adopting AI also have an advantage ove AI startups because of the contextual data and expertise in various domains that the tech giants have collected over decades. William Blair also noted a faster embrace of AI integration by technology giants compared with the early innings of cloud in the 2000s as a positive move.

To calm investors, software vendors will need to show that large enterprises are partnering with their existing vendors and systems of record to drive AI transformations and not building their own software through new AI tools, show that AI accelerates software growth and doesn’t cannibalize it, and get more specific when disclosing AI gross margins, inference costs and unit economics, according to William Blair.

Those moves would also benefit software vendor channel partners as they and their clients navigate where to put investments in future-proofing businesses for the AI era.

PC, Device Headwinds

As Microsoft solution providers ready themselves for future opportunities in the AI, cloud and security portfolio, the headwinds coming for solution providers in hardware are also worth noting, especially as the channel and end users look to when they should invest in AI at the edge and moving more AI processing to PCs and other devices.

Microsoft CFO Hood attributed the last quarter’s on-premises server business revenue increase of 1 percent in part to higher transactional purchasing ahead of memory price increases and SQL Server 2025 demand.

Next quarter, the on-premises server business should see revenue decline in the low single digits, with increased memory pricing potentially creating additional volatility in transactional purchasing, Hood said. She also contributed the decline to a waning bump from SQL Server 2025.

Windows 11 hit 1 billion users, up more than 45 percent year over year and about three months since Microsoft ended support for Windows 10. This milestone could reflect waning opportunities for solution providers not only to migrate users to the new operating system, but in attempts to use Windows 11 as a springboard into Copilot+ and other AI PC purchasing.

Microsoft’s “more personal computing” segment—which includes Windows devices revenue—expects revenue of $12.3 billion to $12.8 billion during the current fiscal quarter, below Wall Street’s expected $13.65 billion.

Hood also said to expect Windows OEM and device revenue to decline in the low teens, with Windows OEM revenue declining around 10 percent.