MICROSOFT CORP (MSFT) Q3 2025 Earnings Summary

Executive Summary

• MSFT delivered a clean beat on both revenue and EPS in Q3 FY25: revenue $70.07B vs S&P Global consensus $68.44B, EPS $3.46 vs $3.22; EBITDA also topped consensus. Strength was broad-based, led by Intelligent Cloud and AI, with Microsoft Cloud revenue at $42.4B (+20% YoY; +22% cc). *
• Azure and other cloud services grew 33% YoY (+35% cc), with 16 points from AI; CFO noted upside this quarter was primarily in non‑AI services, with AI aided by earlier‑than‑planned capacity delivery.
• Operating margin reached 46% (+1pt YoY); company gross margin was 69% (down 1pt YoY) reflecting continued AI infrastructure scaling. Commercial bookings rose 18% and RPO hit $315B (+34% YoY).
• Q4 outlook: P&BP revenue $32.05–$32.35B; Intelligent Cloud $28.75–$29.05B (Azure +34–35% cc); MPC $12.35–$12.85B; COGS $23.6–$23.8B; OpEx $18.0–$18.1B; OI&E ≈ -$1.2B; ETR ≈ 19%. FX expected to add ~1pt to total revenue growth; management flagged AI capacity constraints beyond June.

What Went Well and What Went Wrong

What Went Well

• Microsoft Cloud revenue $42.4B (+20% YoY; +22% cc) and total revenue/EPS beats amid “continued demand for our differentiated offerings.”
• Azure +33% YoY (+35% cc); non‑AI services drove outperformance with enterprise strength and improved scale motions; AI capacity came online faster than expected.
• Bookings/RPO momentum: Commercial bookings +18%; RPO $315B (+34% YoY), with ~40% recognizable over the next 12 months (+17% YoY).
• Quote: “Cloud and AI are the essential inputs for every business to expand output, reduce costs, and accelerate growth.” — Satya Nadella.

What Went Wrong

• Gross margin pressure: Company GM% 69% (down 1pt YoY) and Microsoft Cloud GM% 69% (down 3pts YoY) due to AI infrastructure scaling.
• LinkedIn Talent Solutions faced ongoing hiring market weakness; segment commentary flagged headwinds.
• Windows OEM/devices: only +3% this quarter; Q4 guidance calls for mid‑ to high‑single digit declines as OEM inventory normalizes and devices decline in the high teens.
• AI capacity constraints expected beyond June, limiting near‑term AI revenue contribution despite robust demand.

Financial Results

Consolidated Financials vs prior quarters

Segment Revenue

KPIs

Guidance Changes

Dividends remain ongoing; total capital returns in Q3 were $9.7B (dividends plus repurchases).

Earnings Call Themes & Trends

Management Commentary

• Strategic message: “From AI infra and platforms to apps, we are innovating across the stack to deliver for our customers.” — Satya Nadella.
• AI efficiency thesis: “For every Moore’s Law change… there’s probably a 10x improvement because of software.” — Satya Nadella.
• Execution highlight: “Results exceeded expectations driven by focused execution… revenue from our AI business was above expectations.” — Amy Hood.
• Capacity outlook: “We now expect to have some AI capacity constraints beyond June.” — Amy Hood.
• Monetization quality: “We’re not selling raw GPUs… we are literally going to the real demand… enterprise and our own products.” — Satya Nadella.

Q&A Highlights

• Data center strategy and power/location constraints: Management balances build/lease pace, workload shape, and geo distribution; short power in specific places; long lead‑time decisions.
• Azure growth drivers: Q3 upside skewed to non‑AI services; AI upside from earlier capacity delivery; enterprise acceleration and improving scale motions.
• Capital efficiency and margins: Efficiency gains across hardware/software shorten dock‑to‑live times; AI margins better than prior cloud transition at equivalent stage.
• AI demand/inference economics: Focus on inference monetization with diversified demand (enterprise, Copilot, GitHub); training outlays governed by monetization pace.
• Guidance clarifications: FX adds ~1pt to Q4 revenue growth; Q4 COGS +19–20% cc; OpEx ~+5% cc; Q4 ETR ~19%.

Estimates Context

Values retrieved from S&P Global.*

• Beat magnitude was notable and broad-based; the positive delta versus consensus aligns with stronger non‑AI Azure execution and earlier AI capacity delivery.

Key Takeaways for Investors

• Azure momentum remains robust (33% YoY; 35% cc), with non‑AI services driving Q3 outperformance and AI adding 16 points; expect Azure growth to accelerate to 34–35% cc in Q4, but watch for AI capacity constraints beyond June.
• Margin dynamics: Operating margin expanded to 46% despite AI COGS drag; near‑term gross margin pressure is likely to persist as AI scaling continues, but management emphasizes software‑driven efficiency gains.
• Bookings and backlog are powerful leading indicators (RPO $315B, +34% YoY); roughly 40% recognized within 12 months supports near‑term revenue visibility.
• Copilot adoption is broadening across segments; ARPU lift from E5 and Copilot continues, while seats in SMB/frontline expand—supportive for P&BP durability.
• Search and advertising ex‑TAC (+21% YoY) and gaming (+8% content/services) contribute incremental margin expansion in MPC; Q4 MPC guidance incorporates OEM inventory normalization and devices declines.
• Capital intensity remains elevated near term; Q4 CapEx to increase sequentially, with H2 CapEx plan unchanged; mix shifting toward short‑lived assets in FY26, better correlated to revenue.
• Trading lens: Expect focus on Azure growth cadence, AI capacity commentary at quarter‑end, FX tailwind (+1pt in Q4), and any signs of continued scale‑motion improvement in non‑AI Azure as catalysts for the stock narrative.