Microsoft reports strong second-quarter earnings, while DeepSeek made headlines and stunned the market with its AI, developed in a fraction of the time and cost of its U.S. competitors.
| Q2 2024 (US$ million) | Q2 2025 (US$ million) | Percentage change | |
| Revenue | 62,020 | 69,632 | 12.3% |
| Productivity and Business Processes | 25,854 | 29,437 | 13.9% |
| Intelligent Cloud | 21,525 | 25,544 | 18.7% |
| More Personal Computing | 14,641 | 14,651 | 0.1% |
| Operating income | 27,032 | 31,653 | 17.1% |
| Net income | 21,870 | 24,108 | 10.2% |
Revenue increased 12.3% year-on-year to US$69.6 billion in Q2 2025, driven by strong growth in cloud and AI services. The AI business reached an annual revenue run rate of US$13 billion, reflecting 175% year-over-year growth and surpassing the US$10 billion figure mentioned in the previous earnings call.
Revenue from Microsoft Cloud, its suite of cloud computing services, rose 21% year-on-year to a record US$40.9 billion, as enterprises expanded AI usage beyond specific departments and committed to larger, long-term cloud and subscription contracts.
Revenue from the Productivity and Business Processes segment grew 13.9% year-on-year to US$29.4 billion in Q2 2025, driven by Microsoft 365 Commercial.
The Intelligent Cloud segment saw an 18.7% year-over-year increase, reaching US$25.5 billion, fueled by a 31% rise in Azure and other cloud services. However, this growth was slightly lower than the 33% recorded in the previous quarter.
Revenue from the More Personal Computing segment remained relatively flat at US$14.7 billion. Modest year-on-year growth was supported by higher Windows OEM prebuilds, increased search usage from a third-party partnership, and strong Call of Duty launch performance in gaming.
Capital expenditure totalled US$22.6 billion, with more than half allocated to long-term cloud and AI assets for future monetization. The remainder was spent on servers (CPUs & GPUs) to meet immediate customer demand. The company plans to invest US$80 billion in FY2025, primarily in AI infrastructure such as data centres.
Operating margins increased from 43.6% in Q2 2024 to 45.5% in Q2 2025, driven by business efficiencies from AI infrastructure investments and a shift toward higher-margin businesses. The full-year margin is expected to rise slightly year-on-year.
Net income grew 10.2% year-over-year to US$24.1 billion but was partially offset by a one-time US$800 million impairment charge on its investment in Cruise, General Motors’ autonomous vehicle subsidiary, which underwent restructuring. The company expects double-digit revenue and operating income growth in 2025.
Productivity and Business Processes
This segment includes cloud-based and traditional Office applications like Microsoft 365, the professional networking platform LinkedIn, and enterprise resource planning (ERP) and customer relationship management (CRM) solutions through Dynamics 365.
CEO Satya Nadella described Microsoft 365 Copilot as ‘the UI for AI.’ Both commercial and consumer cloud segments exceeded expectations as more customers adopted Copilot for various tasks. Early adopters expanded their seats more than tenfold over the past 18 months, and Copilot’s daily active users more than doubled quarter-on-quarter, contributing to higher average revenue per user (ARPU). However, potential shifts to lower-cost plans may impact margins. Revenue from one-time Office and on-premises Windows purchases is expected to decline by mid-single digits.
LinkedIn revenue grew despite hiring slowdowns in some industries. LinkedIn Premium surpassed US$2 billion in annual subscription revenue for the first time in Q2 2025, with subscriber growth nearing 50% over the past two years and increasing user engagement.
Dynamics 365 revenue rose as businesses expanded adoption across multiple functions, strengthening its market share.
Segment revenue is projected to grow between 11% and 12% in the next quarter.
Intelligent Cloud
Azure, Microsoft’s cloud computing platform, is ‘the infrastructure layer for AI,’ as described by CEO Satya Nadella. It remains a key growth driver for this segment, delivering strong results in AI storage, databases, and app services. Despite substantial investments in data centres, capacity constraints persist.
Microsoft has an exclusive cloud infrastructure agreement with OpenAI and benefits from a right of first refusal arrangement, granting it priority access to OpenAI’s cutting-edge AI technology and resources before they are made available to others.
Meanwhile, OpenAI recently announced its Stargate venture in partnership with Oracle and SoftBank to build data centres across the U.S. to support the future of AI.
Microsoft is significantly enhancing AI efficiency, particularly in inference, achieving price-performance improvements of over 100% per hardware generation and 900% per model generation through software optimizations. These advancements align with Moore’s Law, driving higher performance and lower costs. As AI adoption accelerates, Microsoft is expanding its flexible AI infrastructure for cost-effective scaling.
The company’s commercial committed future revenue has risen to approximately US$298 billion, reflecting strong customer commitments.
Non-AI services grew slower than expected due to go-to-market challenges, particularly among mass-market customers. On-premises server revenue declined 3%, impacted by customer hesitation and deferred spending ahead of the Windows Server 2025 launch.
Segment revenue is projected to grow between 19% and 20%, driven by Azure and other cloud services.
Non-AI services grew slower than expected due to go-to-market challenges, particularly among mass-market customers. On-premises server revenue declined 3%, impacted by customer hesitation and deferred spending ahead of the Windows Server 2025 launch.
Segment revenue is projected to grow between 19% and 20%, driven by Azure and other cloud services.
More Personal Computing
This segment generates revenue from Windows, gaming, search, and devices. Operating income rose 32.2% year-on-year in Q2 2025 as the company prioritized higher-margin opportunities.
Revenue from Windows OEM and devices increased as customers accelerated PC and device purchases to avoid potential tariff-related cost increases and ahead of Windows 10’s end-of-support deadline. Windows 11 and Copilot+ PCs remain popular among users.
In Q2 2025, Microsoft’s gaming revenue declined 7% year-on-year due to lower Xbox hardware sales. However, Xbox Game Pass set a new quarterly revenue record, with 30% growth in the PC subscriber base. Xbox Cloud Gaming also showed strong momentum.
Search and news advertising revenue, excluding traffic acquisition costs, increased due to higher usage from third-party partnerships. Both ad volume and revenue per advertisement saw healthy growth. The market shares of Bing and Edge have also expanded, with Edge gaining market share for 15 consecutive quarters and surpassing 30% market share in the U.S. on Windows.
Microsoft expects segment revenue to decline quarter-on-quarter in Q3 2025 to between US$12.4 billion and US$12.8 billion, citing potentially lower Windows OEM and device sales, a strengthening U.S. dollar, and the normalization of third-party partnership usage. Management plans to focus on higher-margin first-party games and services, such as Xbox Game Pass and paid subscriptions.
Key analyst questions
Microsoft is embracing open collaboration in AI, recognizing ‘real innovations’ from partners like DeepSeek. The DeepSeek R1 model is already driving efficiency gains and will soon enable local AI processing on Copilot+ and Windows PCs, reducing costs and latency while strengthening Windows as an AI platform. This democratization of AI benefits both users and Microsoft. DeepSeek R1 is now available on Microsoft’s Foundry platform and GitHub, featuring built-in safety mechanisms for responsible use.
In response to an analyst, CEO Satya Nadella highlighted the growing enterprise adoption and expansion of Microsoft Copilot. Initially, companies deployed Copilot on a small scale as a proof of concept within specific departments where productivity gains were evident. Now, adoption is shifting toward larger departmental deals and multi-team integrations, driven by cross-functional collaboration. As a result, Copilot Chat was introduced to enhance collaboration and productivity across teams.
An analyst inquired whether the surge in commercial bookings and backlog reflected sustainable momentum or was driven by a few one-time large contracts. CFO Amy Hood attributed the growth to commitments from OpenAI as well as both existing and new customers.
An analyst expressed disappointment that Azure’s commercial bookings came in at the lower end of the guidance range. CFO Amy Hood explained that while AI revenue remains strong, capacity constraints persist. On the non-AI side, Microsoft faced challenges selling cloud services to businesses that purchase through resellers and partners rather than directly from Microsoft. These customers are navigating AI adoption while still relying on traditional cloud services. To support this transition, Microsoft adjusted its sales strategy to better cater to both AI and non-AI cloud needs.
Hood noted that both Azure and Copilot exceeded expectations, with Copilot showing strong growth in new user acquisitions and expansions. She emphasized that as users derive more value, demand increases, leading to a favourable price per seat. This reinforces Copilot’s role in driving AI revenue growth alongside Azure.
The fifth perspective
Microsoft delivered strong Q2 2025 earnings despite challenges in the gaming sector. A strengthening U.S. dollar is expected to reduce revenue growth by two percentage points. However, continued expansion in the Productivity & Business Processes and Intelligent Cloud segments is expected to sustain momentum in the next quarter.
As Microsoft heavily invests in AI infrastructure (a fixed cost) to meet rising demand for cloud services and AI solutions, the increased AI capacity coming online will drive future revenue growth. This growth in AI services can significantly boost profits without proportional cost increases, demonstrating strong operating leverage and contributing more to Microsoft’s overall revenue.
