MICROSOFT CORP (MSFT) Q2 2025 Earnings Summary

Executive Summary

• Q2 FY25 delivered double-digit top and bottom line growth: revenue $69.6B (+12% y/y), operating income $31.7B (+17% y/y), net income $24.1B (+10% y/y), diluted EPS $3.23 (+10% y/y) .
• Microsoft Cloud revenue reached $40.9B (+21% y/y) with Azure growth of 31% y/y; AI annual revenue run-rate surpassed $13B (+175% y/y), beating internal expectations, as Copilot adoption, seats and ARPU expanded .
• Commercial bookings surged 67% (+75% cc), RPO rose to $298B (+34%), driven by large Azure commitments including OpenAI; operating margin expanded to 45% as OpEx growth was held to 5% .
• Q3 outlook: FX headwind (-2 pts to revenue growth; ~$1B impact vs October assumptions), Azure growth guided to 31–32% cc amid continued AI capacity constraints; segment revenue ranges provided with COGS $21.65–$21.85B and OpEx $16.4–$16.5B .
• Shareholder returns of $9.7B in Q2; quarterly dividend later announced at $0.83 per share (payable June 12, 2025) .

What Went Well and What Went Wrong

• What Went Well

  • AI monetization accelerated: “AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year” (Nadella); Azure AI services grew 157% y/y with stronger-than-expected contribution .
  • Bookings and backlog strength: Commercial bookings +67% (+75% cc); RPO reached $298B (+34%); ~40% to be recognized in next 12 months (+21% y/y) (Hood) .
  • Margin discipline: Company operating margin rose 2 pts to 45% on 5% OpEx growth as mix shifted to higher-margin businesses and gaming/search margins improved (Hood) .
  • Copilot momentum: rapid adoption and seat expansion across enterprises; usage intensity +60% q/q; multiple 10k+ seat deals (Nadella) .
  • DAX Copilot scaling in healthcare: >2M monthly physician-patient encounters (+54% q/q) (Nadella) .

• What Went Wrong

  • Azure non-AI execution challenges: non-AI growth slightly below plan due to go-to-market issues in “scale motions” (partner/indirect), pressuring near-term non-AI consumption (Hood) .
  • Capacity constraints: AI demand continued to exceed near-term capacity; supply pushouts from third parties constrained Azure growth (Hood) .
  • Intelligent Cloud gross margin down 4 pts y/y driven by scaling AI infrastructure (Hood) .
  • Gaming hardware declines offset content/services growth, resulting in -7% segment revenue y/y despite strong Blizzard/Activision performance (Hood) .
  • OI&E headwind: Other income/expense was -$2.3B, below October guidance, primarily due to a Cruise impairment (Hood) .

Financial Results

Note: No S&P Global consensus estimates available due to API limit; comparisons to Wall Street estimates are unavailable.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Satya Nadella: “Our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year” . “On inference… more than 2x price-performance per hardware generation and more than 10x per model generation due to software optimizations” .
• Amy Hood: “Commercial bookings increased 67% and 75% in constant currency… driven by Azure commitments from OpenAI” . “Operating margins increased 2 points year-over-year to 45%… delivering efficiencies as we invest to scale AI infrastructure” .
• Nadella on capacity: “We will be… roughly in line with near-term demand by the end of FY ’25” .
• Hood on Azure mix: “Azure growth included 13 points from AI services… demand continued to be higher than our available capacity… non-AI services slightly lower than expected due to go-to-market execution challenges” .

Q&A Highlights

• Azure non-AI execution and capacity: Management detailed non-AI “scale motion” go-to-market adjustments and ongoing AI capacity constraints; confidence in H2 acceleration as new capacity comes online (Hood/Nadella) .
• AI revenue drivers: Outperformance driven by Azure AI and Copilot seats/expansion and ARPU; usage intensity rising though indirectly monetized (Hood) .
• OpenAI partnership and CapEx strategy: Microsoft emphasized fungible fleet, balanced training vs inference, and capital aligned to contracted backlog; equity method losses capped by $13B investment (Nadella/Hood) .
• Guidance clarifications: FX now a larger headwind for Q3 (~$1B impact); segment revenue ranges and Azure 31–32% cc reiterated; tax rate ~18% (Hood) .
• AI cost curve: Lower inference costs enable ubiquity; mix of proprietary and open models expected; Foundry to manage model complexity and AIOps (Nadella) .

Estimates Context

• S&P Global Wall Street consensus estimates were unavailable due to API limits; as a result, this report does not include comparisons versus consensus for revenue or EPS. We explicitly note unavailability of S&P Global data for estimate comparisons.
• Implications: Given internal commentary that Azure revenue growth came at the low end of guidance and FX is a new headwind for Q3, sell-side models may modestly trim near-term Azure non-AI growth and raise COGS/FX assumptions while increasing AI-related revenue trajectories in H2 based on capacity additions .

Key Takeaways for Investors

• AI monetization is scaling faster than expected (ARR $13B), with Copilot adoption and Azure AI growth providing durable multi-year revenue drivers; near-term capacity constraints are the primary limiter rather than demand .
• Bookings/RPO strength (+67% bookings; RPO $298B) supports forward revenue visibility; ~40% of RPO recognized within 12 months (+21% y/y) .
• Margin management remains disciplined despite AI infrastructure scaling; operating margin +2 pts y/y with only +5% OpEx growth, aided by mix shift to higher-margin businesses .
• Q3 guidance introduces FX headwinds (~$1B) and continued AI capacity constraints; expect H2 acceleration in Azure as capacity aligns with demand, but non-AI execution recovery will be gradual .
• Gaming normalizes post-Activision integration with hardware pressure offset by content/services; subscription recognition (Game Pass, ratable revenue) smooths quarterly revenue but supports margin quality long-term .
• Security and healthcare AI solutions (Security Copilot, DAX) show expanding adoption, creating diversified AI monetization vectors beyond Azure compute .
• Dividend continuity ($0.83 per share) and ongoing buybacks ($9.7B returned in Q2) underscore capital return alongside elevated AI CapEx investment cadence .