Microsoft's AI Buildout Squeezes Free Cash Flow Amid Record Spending

Microsoft's $115.9 billion AI buildout is straining its free cash flow, falling 6.46% to $66.987 billion in fiscal year 2025. The tech giant spent nearly eight times more on capital expenditures than it paid out in dividends, which rose 31.34% to $133.749 billion. Azure revenue surpassed $100 billion for the first time, and Microsoft 365 Copilot reached over 30 million paid seats.

The company's commercial remaining performance obligations hit $678 billion, up 84%, a backlog that dwarfs annual revenue. CFO Amy Hood signaled that the intensity of spending will not ease, expecting capital expenditures to grow year-over-year in fiscal year 2027 and remain free cash flow positive.

Microsoft's dividend raise in September was unusual, with shareholders receiving a bigger check but also facing a reduced payout as a result of the company's massive AI investment. The next dividend announcement is weeks away, and it will be clear whether Nadella can keep funding both the buildout and shareholder returns.