Q1 2025 Summary
Published Jan 28, 2025, 9:22 PM UTC- Microsoft's strategic partnership with OpenAI is driving AI leadership and growth, as both companies have benefited significantly, with Microsoft building differentiated IP and driving revenue momentum.
- Rapid adoption of Microsoft 365 Copilot is accelerating revenue growth, with nearly 70% of the Fortune 500 now using it, and customers adopting it faster than any previous Microsoft 365 suite.
- Microsoft's AI business is on track to reach a $10 billion annual revenue run rate, making it the fastest-growing business in the company's history, driven by strong demand for AI services.
- Microsoft is facing significant external constraints in scaling up their AI and cloud infrastructure, including data center capacity and power availability, which could impact their ability to meet demand and affect growth.
- High capital expenditure requirements to support AI growth, including investments in data centers, power, and training infrastructure, could weigh on Microsoft's financials, especially if demand doesn't materialize as expected. ,
- Significant investment of $13 billion in OpenAI and recognizing losses under the equity method accounting could impact Microsoft's earnings, and there may be concerns about over-reliance on OpenAI and potential tensions in the partnership.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Productivity & Business Processes Revenue Growth | Q1 2025 (YoY) | 10%–11% YoY () | 28,317M vs 18,592M → +52.3% () | Beat |
Intelligent Cloud Revenue Growth | Q1 2025 (YoY) | 18%–20% YoY () | 24,092M vs 24,259M → –0.7% () | Missed |
More Personal Computing Revenue Growth | Q1 2025 (YoY) | 9%–12% YoY () | 13,176M vs 13,666M → –3.6% () | Missed |
Gaming Revenue Growth | Q1 2025 (YoY) | Mid-30s% YoY () | 5,621M vs 3,919M → +43.4% () | Beat |
Windows OEM Revenue Growth | Q1 2025 (YoY) | Relatively flat YoY () | 4,329M vs 5,567M → –22.3% () | Missed |
LinkedIn Revenue Growth | Q1 2025 (YoY) | High single digits YoY () | 4,292M vs 3,913M → +9.7% () | Met |
Dynamics Revenue Growth | Q1 2025 (YoY) | Low- to mid-teens% YoY () | 1,849M vs 1,540M → +20% () | Beat |
Search and News Advertising ex-TAC Revenue Growth | Q1 2025 (YoY) | Mid- to high teens% YoY () | 3,225M vs 3,053M → +5.6% () | Missed |
COGS | Q1 2025 | 19.95B–20.50B () | 20,099M () | Met |
Operating Expense | Q1 2025 | 15.2B–15.3B () | 14,934M (SG&A 7,390M + R&D 7,544M) () | Beat |
Capital Expenditures | Q1 2025 (YoY) | Expected to increase () | 14,923M outflow vs 9,917M outflow in Q1 2024 → +50.5% increase () | Met |
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Azure Growth Deceleration
Q: What's causing Azure's growth deceleration beyond tougher comps?
A: Microsoft explained that the Azure growth deceleration from 34% in Q1 to low 30s in Q2 is primarily due to supply constraints, specifically supply pushouts in AI capacity coming online later than expected. Underlying consumption growth remains stable from Q1 to Q2. They expect acceleration in the second half as supply improves. -
Capital Expenditure Outlook
Q: Will CapEx growth return to align with cloud revenue growth?
A: Microsoft stated that as demand continues to grow, CapEx growth will slow, and revenue growth will increase, bringing them closer over time. The pace depends on adoption, but over time, CapEx and revenue growth should get closer together like in the last cycle. -
OpenAI Partnership
Q: How does Microsoft view its relationship with OpenAI given recent media stories?
A: Microsoft views its partnership with OpenAI as mutually beneficial, leading to great success for both companies. They continue to invest in infrastructure for OpenAI and innovate on top of their models, resulting in products like GitHub Copilot and M365 Copilot. Microsoft is committed to growing together and meeting demand from both OpenAI and broader customers. Their investment in OpenAI is accounted under the equity method, with a total investment of $13 billion. -
Supply Constraints Impacting Azure
Q: Are supply limitations affecting Azure growth in Q2?
A: Yes, supply limitations due to third parties delivering later than expected are impacting Azure growth in Q2. The supply pushouts are mainly into the second half of the year. This constraint, along with revenue recognition benefits in Q1, affects the sequential growth difference. -
Copilot Adoption and Revenue Impact
Q: How is Copilot adoption affecting financial results?
A: Microsoft reports strong momentum with Copilot, noting it's the fastest-growing new suite in M365 history. Penetration in the Fortune 500 is significant, and customers are expanding usage. The impact of Copilot is seen in M365 Commercial revenue, but growth is somewhat masked by the addition of lower ARPU seats from frontline workers and small businesses. Going forward, the impact will be more visible in ARPU. -
AI Investments: Inference vs. Training
Q: How does inference revenue factor into AI investments?
A: Microsoft's fastest growth to $10 billion in any business is driven by AI inference revenue. They focus on real demand from enterprises and their own products like GitHub Copilot, rather than selling GPUs for others to train models. The current inference revenue funds the next cycle of training investments. -
Constraints in AI Investments
Q: What are Microsoft's internal and external constraints in AI investments?
A: Internally, capital outlay for training is limited by monetization of inference demand. Microsoft aligns training investments with Moore's Law advancements. Externally, rapid demand has led to constraints in data center capacity and power availability. They expect supply and demand to align better in the second half of the fiscal year. -
Evolution to Agents
Q: How is Microsoft evolving from Copilots to agents?
A: Microsoft has developed a system including Copilot, Copilot Studio, agents, and autonomous agents. Copilot serves as the AI UI layer, while Copilot Studio allows users to build and extend agents. Autonomous agents can operate independently but interact with Copilot when needed. This entire stack is also available as building block services in Azure.