Microsoft kicked off its fiscal year with a strong performance, delivering double-digit growth in both revenue and profit. This growth was driven by increased demand for Microsoft’s cloud platform and strong execution by its sales teams and partners.
According to CEO Satya Nadella, Microsoft’s AI business is on track to surpass an annual revenue run rate of US$10 billion’ in Q2 2025. This achievement would mark it as the fastest-growing segment in the company’s history to reach this milestone.
| Financial indicator | Q1 2024 (US$ million) | Q1 2025 (US$ million) | Percentage change |
| Revenue | 56,517 | 65,585 | +16.0% |
| Productivity and Business Processes | 25,226 | 28,317 | +12.3% |
| Intelligent Cloud | 20,013 | 24,092 | +20.4% |
| More Personal Computing | 11,278 | 13,176 | +16.8% |
| Operating income | 26,895 | 30,552 | +13.6% |
| Net income | 22,291 | 24,667 | +10.7% |
Overall revenue increased 16.0% year-on-year to US$65.6 billion in Q1 2025 due to solid performances across all its business segments. There was a significant rise in the number of high-value contracts for both Azure and Microsoft 365.
Revenue from the Productivity and Business Processes segment grew 12.3% year-on-year to US$28.3 billion in Q1 2025, driven by the 15% growth in Microsoft 365 commercial cloud revenue.
The segmental revenue from Intelligent Cloud increased 20.4% year-on-year to US$24.1 billion in Q1 2025 because of 33% increase in Azure and other cloud services revenue.
Revenue from the More Personal Computing segment increased 16.8% year-on-year to US$13.2 billion in Q1 2025, led by the 15-percentage-point increase from the Activision Blizzard acquisition.
The overall operating income expanded 13.6% year-on-year in Q1 2025 despite the one-percentage-point drop in operating margin from 47.6% to 46.6% over the same period as Microsoft scaled its AI infrastructure.
Capital expenditures including finance leases stood at US$20 billion during the quarter. Approximately half of this investment is focused on long-term assets, such as data centres and AI development tools, to support future growth and revenue. The remaining half is allocated to short-term resources, like servers, to meet immediate customer demand.
Productivity and Business Processes
This segment which includes products like Microsoft 365, Dynamics 365, and LinkedIn is a major revenue driver for the company. This segment has consistently contributed significantly to Microsoft’s overall revenue.
Microsoft 365, with its suite of productivity apps like Word, Excel, PowerPoint, and Teams, is widely used by individuals and businesses worldwide. AI-assistant Copilot has been integrated into Microsoft 365 since September 2024. As a result, Microsoft 365 Copilot now delivers responses twice as fast as before and has enhanced response quality nearly threefold. Its daily user base has more than doubled quarter-over-quarter, with increasing adoption by enterprise customers, including 70% of Fortune 500 companies.
Microsoft 365’s growth is significantly influenced by the adoption of E5 licenses and Copilot, both contributing to an increase in average revenue per user (ARPU). While the addition of lower-ARPU seats from small businesses and frontline workers may dilute the overall average, the rising adoption of higher-ARPU products like E5 and Copilot is expected to drive long-term ARPU growth. Additionally, Microsoft 365 consumer subscriptions have shown continued momentum, growing 10% to reach 84.4 million total subscriptions. Microsoft Teams also remains very popular among enterprise customers.
Copilot Studiois a platform that allows developers to create custom AI assistants tailored to specific business needs. It is a toolbox to build your own Copilots. The number of businesses that have used Copilot Studio to date surged over two times to more than 100,000 including Standard Bank and Thomson Reuters.
LinkedIn is a professional networking platform that continues to expand its user base and generate revenue through advertising and premium subscriptions. The platform’s revenue increased 10% year-on-year during the quarter. It has more than a billion members with double-digit growth seen across India and Brazil. Total video viewership on LinkedIn is increasing which provides more advertising opportunities. LinkedIn’s new AI Hiring Assistant helps evaluates candidates and increase candidate acceptance rates.
Dynamics 365, Microsoft’s enterprise resource planning and customer relationship management software, is gaining momentum among businesses, including Heineken. The platform now features 10 new AI-powered agents designed to automate tasks, boosting efficiency and productivity for businesses. Dynamics revenue grew by 14%, driven largely by the robust performance of Dynamics 365, which accounted for 90% of the total Dynamics revenue. This growth stems from increased adoption across various workloads and market share gains. Additionally, the number of monthly active users of Copilot within the Dynamics 365 portfolio surged over 60% quarter-over-quarter.
Intelligent Cloud
Azure is the company’s cloud computing platform, offering a wide range of services like compute, storage, databases, and AI. Together with other cloud services, it is the primary revenue driver for this segment. The demand for cloud services is strong and the company continues to focus on AI and machine learning.
Azure and other cloud services revenue rose by 33% (34% in constant currency), supported by healthy consumption trends that met projections. The better-than-expected performance was partially attributed to a small benefit from in-period revenue recognition.
Azure’s growth included approximately 12 percentage points from AI services, consistent with the previous quarter. Demand for AI services remained higher than available capacity. Non-AI growth trends also met expectations across regions, as customers continued migrating and modernizing on the Azure platform.
Server Products include products like Windows Server and SQL Server. Revenue from these on-premises server business decreased 1% year-on-year in Q1 2025 because of lower-than-anticipated transactional purchases ahead of the Windows Server 2025 launch as more businesses shift their workloads to the cloud.
More Personal Computing
This segment primarily comprises Windows and devices, gaming, and search and news advertising.
Revenue from Windows and devices includes sales of Windows licenses, Surface devices, and other hardware. This subsegmental revenue increased 2% year-over-year as Microsoft sold more Windows licenses in markets where they could generate higher revenue per license. However, Microsoft sold fewer devices than expected.
Search and news advertising revenue excluding traffic acquisition costs increased 18%, year-on-year in Q1 2025 as ad price per unit and volume grew across Edge and Bing. Copilot has been integrated into these services and provide features like Voice and Vision. Bing and Edge market shares continue to increase. Bing’s revenue grew faster than the overall revenue of the entire search industry.
Gaming revenue increased 43% year-on-year because of the Activision Blizzard acquisition as well as stronger-than-expected performance in both Microsoft-developed and third-party games, as well as console sales. In Q1 2025, Microsoft recorded its highest-ever monthly active users across devices and Xbox. Further, Game Pass achieved record-high total revenue and average revenue per subscriber. The recent launch of Call of Duty: Black Ops 6 set new records for day-one players and Game Pass subscriber additions.
Key analyst questions
Microsoft is undergoing a significant transition, similar to its cloud transformation a decade ago. The surge in demand for AI products like ChatGPT and Copilot has strained infrastructure, particularly data centres. To meet this demand, Microsoft is investing heavily in expanding its infrastructure globally, which may temporarily increase costs but is expected to drive long-term growth.
Microsoft also experienced a delay in receiving certain hardware components from third-party suppliers. This delay affected their ability to meet customer demand, leading to slower revenue growth in Q2 compared to Q1. The company expects a stronger performance in the second half of FY2025 as supply chain issues are resolved.
Microsoft is strategically investing in AI based on inference demand, focusing on practical applications like GitHub Copilot and Microsoft 365 Copilot. The revenue generated from these applications fuels further AI development, creating a virtuous cycle of innovation and growth.
GitHub is a cloud-based platform to store, share, and collaborate on software projects. Microsoft has seen a 55% quarter-over-quarter increase in Copilot Enterprise customers notably, AMD and Flutter Entertainment.
Microsoft’s Commercial Copilot has achieved the fastest growth among all Microsoft 365 services and is particularly popular among Fortune 500 companies. The company is also making strides with Copilot Studio and agents, and is excited about the potential of Copilot+PCs, which aims to revolutionise PCs.
An analyst was keen to know more about the relationship between OpenAI and Microsoft that made global headlines as Sam Altman, the CEO of OpenAI, was fired by the company’s board and was later reinstated. The response from Nadella was somewhat evasive. He only highlighted the mutually beneficial partnership with OpenAI without addressing the board’s reshuffle and internal conflict.
CFO Amy Hood added that Microsoft’s investment in OpenAI is structured as an equity method investment, meaning they record their share of OpenAI’s losses on their income statement. These losses are capped at the total investment of US$13 billion.
The fifth perspective
Microsoft’s revenue quality is strong due to its diversified portfolio and real demand for its AI-powered products and services. Microsoft continues to partner with companies like AMD, Intel, NVIDIA, and Qualcomm to deliver AI-powered services, tools, and devices to customers. As demand for AI continues to grow, Microsoft is strategically positioning itself to capitalise on the AI revolution and maintain its competitive edge.
