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Microsoft Corp Earnings - Analysis & Highlights for Q2 2025
Overview
PositivesNegativesOutlook
- Azure and other cloud services revenue grew by 31%.
- Azure growth included 13 points from AI services, which grew 157% YoY and was ahead of expectations even as demand continued to be higher than the available capacity.
- Microsoft 365 Commercial Cloud revenue increased by 16% and 15% in constant currency, slightly ahead of expectations due to better-than-expected performance in E5 and Microsoft 365 Copilot.
- Microsoft Cloud revenue surpassed $40 billion in Q2, up 21% YoY.
- Dynamics 365 took share as organizations like Ecolab, Lenovo, RTX, TotalEnergies, and Vizient switched to AI-powered apps from legacy providers.
- FX is expected to decrease total revenue growth by 2 points.
- Windows OEM and Devices revenue is expected to decline in the low to mid single digits.
- Microsoft Cloud gross margin percentage was 70%, down 2 points YoY, driven by scaling AI infrastructure.
- Operating expenses increased by 6%.
- FX decreased revenue more than expected in commercial segments.
- FX is expected to decrease total revenue growth by 2 points, with a 2-point decrease in Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
- Intelligent Cloud revenue is expected to grow between 19% and 20% in constant currency or $25.9 billion to $26.2 billion.
- Revenue in the on-premises server business is expected to decline in the mid single digits, driven by a decrease in transactional purchasing.
- Revenue growth in Enterprise and Partner Services is expected to be in the low to mid single digits.
- Other income and expense is expected to be roughly negative $1 billion, primarily driven by investments accounted for under the equity method.
Q&A Highlights from Microsoft Corp Earnings Call Q2 2025
- Analyst asked about the execution issues and resolution in Q2, specifically regarding the non-AI ACR component.
- Amy Hood explained that the company faced challenges in the non-AI ACR component due to the scale motion, which involves customers reached through partners and indirect selling methods. The company made adjustments to its sales motions in the summer to balance AI workloads with migration and fundamental tasks. While the company is making adjustments to ensure a balance, they expect some impact on H2 results due to the scale motion.
- Amy Hood explained that the company faced challenges in the non-AI ACR component due to the scale motion, which involves customers reached through partners and indirect selling methods. The company made adjustments to its sales motions in the summer to balance AI workloads with migration and fundamental tasks. While the company is making adjustments to ensure a balance, they expect some impact on H2 results due to the scale motion.
- Analyst asked about Microsoft's approach to OpenAI's success and their strategic decision regarding Stargate.
- Microsoft remains committed to OpenAI's success and has given them the right of first refusal (ROFR) for future training CapEx needs. The company's partnership with OpenAI is important for their success, and they will continue to work together to optimize their AI models and drive demand. Microsoft is building a fungible fleet of AI infrastructure that is geo-distributed and optimized for both training and inference. They are managing the fleet physics to ensure that they have the right ratio of monetization and demand-driven monetization to what they think of as the training expense. The company has a close to $300 billion RPO, which is committed customer contracts that need to be delivered, and they want to do it as efficiently as possible. The investment in CapEx is focused on building infrastructure and catching up on the AI infrastructure they needed, as well as the commercial cloud. The pivot to more CPU and GPU will be more directly correlated to revenue and will be contracted with customers.
- Microsoft remains committed to OpenAI's success and has given them the right of first refusal (ROFR) for future training CapEx needs. The company's partnership with OpenAI is important for their success, and they will continue to work together to optimize their AI models and drive demand. Microsoft is building a fungible fleet of AI infrastructure that is geo-distributed and optimized for both training and inference. They are managing the fleet physics to ensure that they have the right ratio of monetization and demand-driven monetization to what they think of as the training expense. The company has a close to $300 billion RPO, which is committed customer contracts that need to be delivered, and they want to do it as efficiently as possible. The investment in CapEx is focused on building infrastructure and catching up on the AI infrastructure they needed, as well as the commercial cloud. The pivot to more CPU and GPU will be more directly correlated to revenue and will be contracted with customers.
- Analyst asked about Microsoft's Copilot portfolio and how the company plans to package and evolve its go-to-market strategy to address a broader range of customers.
- Satya Nadella explained that Microsoft has made two announcements recently, one on the M365 Copilot side and the other on the consumer side, which will accelerate seat usage and agent building. He also mentioned that the company will continue to optimize inference costs and drive ubiquity of features across its portfolio.
- Satya Nadella explained that Microsoft has made two announcements recently, one on the M365 Copilot side and the other on the consumer side, which will accelerate seat usage and agent building. He also mentioned that the company will continue to optimize inference costs and drive ubiquity of features across its portfolio.
- Analyst asked about the percentage of inference done on Azure that will be done on proprietary models versus open models, and whether it matters to Microsoft.
- Satya Nadella explained that there will be a combination of proprietary and open models, and that it's important to have front-tier models to build applications with high ambition. He also mentioned that the company is investing heavily in Foundry, an app server that allows developers to manage the complexity of different models and benefit from all the innovation.
- Satya Nadella explained that there will be a combination of proprietary and open models, and that it's important to have front-tier models to build applications with high ambition. He also mentioned that the company is investing heavily in Foundry, an app server that allows developers to manage the complexity of different models and benefit from all the innovation.
- Analyst asked about the strength of Microsoft's revenue growth, specifically in departmental deals and usage trends.
- Satya Nadella explained that the initial set of seats were for places where there is a belief in immediate productivity, such as sales teams, finance, or supply chain. However, he noted that people collaborate across functions and roles, and that the collaboration network effects demand that the product be spread across the enterprise. He mentioned that Microsoft has made it easier to start with Copilot Chat, which gives enterprise customers more flexibility to have something that is more ubiquitous.
- Satya Nadella explained that the initial set of seats were for places where there is a belief in immediate productivity, such as sales teams, finance, or supply chain. However, he noted that people collaborate across functions and roles, and that the collaboration network effects demand that the product be spread across the enterprise. He mentioned that Microsoft has made it easier to start with Copilot Chat, which gives enterprise customers more flexibility to have something that is more ubiquitous.
- Analyst asked about the breadth of Microsoft's revenue growth, specifically if it was broad-based.
- Amy E. Hood explained that the company's revenue growth was driven by a combination of factors, including core motions such as renewals of existing contracts, add-ons, and suite momentum. She also mentioned that large Azure commitments were a significant contributor to the growth, with both existing and new customers making larger commitments. She emphasized that the growth was broad-based and not just one thing, with good execution consistently across the workloads.
- Amy E. Hood explained that the company's revenue growth was driven by a combination of factors, including core motions such as renewals of existing contracts, add-ons, and suite momentum. She also mentioned that large Azure commitments were a significant contributor to the growth, with both existing and new customers making larger commitments. She emphasized that the growth was broad-based and not just one thing, with good execution consistently across the workloads.
