Microsoft sees earnings growth but slowdown in cloud services and continued spending on AI worry investors

Microsoft reported growth in both revenue and earnings for its second quarter, but its forecast for slower growth in its cloud business and continued expenditure on artificial intelligence (AI) have dampened investor sentiment.

The tech firm’s shares declined by about 5% in after-hours trading on Wednesday.

The Windows maker’s revenue increased 12% year-on-year to $69.6 billion in Q2 FY25. Its net profit in the quarter surged to $24.1 billion, up 10% from the corresponding previous period.

Microsoft is a key player in the cloud computing industry, competing with Amazon Web Services, and Google Cloud. Its overall cloud business revenue in Q2 FY25 was $40.9 billion, up 21% YOY. 

In Q2 FY25, revenue growth from the Azure cloud computing platform and other cloud services was 31%, compared with 33% in the corresponding quarter last year. 

The company forecasts Azure to clock a revenue growth of 31% to 32% in the third quarter in constant currency, slower than 35% in the year-ago period.

Increased focus on AI

Microsoft, like the other tech giants Google, Meta and Amazon, has significantly increased capital expenditure (capex) to expand the server and data centre infrastructure, driven by the exponential growth of AI and its demanding computational requirements.

Microsoft Chairman and Chief Executive Officer Satya Nadella highlighted that the company’s AI business has now surpassed an annual revenue run rate of $13 billion, up 175% YoY.

“The contribution from our AI services will grow from increased AI capacity coming online,” noted Amy Hood, Executive Vice President and Chief Financial Officer of Microsoft, during the company’s earnings call.

The company’s capex was $22.6 billion in the second quarter. 

“We expect quarterly spend in Q3 and Q4 to remain at similar levels as our Q2 spend,” noted Hood.

She explained, “The investment you see us making … capex ... The frontend has been this infrastructure build that lets us really catch up, not just on the AI infrastructure we needed – think about that as the building itself, data centres – but also some of the catch-up we needed to do on the commercial cloud side.”

Social media giant Meta, which also announced its quarterly earnings today, said it plans to ramp up its capex in 2025, in the range of $60 billion to $65 billion, up from $39.23 billion in FY24.

DeepSeek’s impact

Meanwhile, DeepSeek, a Chinese startup, is causing waves in the AI landscape with AI models challenging some of the top models in the United States.

Commenting on DeepSeek, Nadella said, “DeepSeek has some real innovations. And that is some of the things that even OpenAI found in o1. And so, we are going to – obviously, now that all gets commoditised, and it’s going to get broadly used.”

Microsoft, a major investor in OpenAI, has solidified its partnership by significantly increasing its investment in the AI firm in recent times.

“We remain very happy with the partnership with OpenAI. And as you saw, they have committed in a big way to Azure,” Nadella noted.

“We are working super hard on all the software optimisations, I mean, just not the software optimisations that come because of what DeepSeek has done, but all the work we have done to, for example, reduce the prices of GPT models over the years in partnership with OpenAI,” he added.

Growth across segments

The Redmond-headquartered firm broadly categorises its revenue under three segments—productivity and business processes, intelligent cloud, and more personal computing.

Microsoft's productivity and business processes clocked $29.4 billion in revenue in the quarter, up 14% year-over-year.

Revenue for intelligent cloud, which includes the Azure cloud computing platform, rose 19% to $25.5 billion in the December-ended quarter.

More personal computing—which includes Windows OEM, Devices, Xbox content and services, search, and news advertising—was relatively unchanged during the quarter with $14.7 billion revenue. 

Revenue from Microsoft’s business and employment-oriented online service, LinkedIn, increased 9%, with growth across all lines of business.

Speaking about LinkedIn, Nadella said the company is innovating with agents to help recruiters and small businesses find qualified candidates faster. 

In subscriptions, LinkedIn Premium surpassed $2 billion in annual revenue for the first time this quarter, he added.

LinkedIn’s subscriber growth has increased nearly 50% over the past two years, and nearly 40% of subscribers have used the platform’s AI features to improve their profiles, according to Nadella. 

Gaming continues to be a key focus for Microsoft, with the company making significant advancements in this space in recent years, including the introduction of next-generation consoles and cloud gaming.

“We are focused on improving the profitability of the business, in order to position it for long-term growth, driven by higher-margin content and platform services. And we are delivering on this plan,” Nadella said. 

Outlook

With the strengthening of the US dollar since October, Microsoft expects foreign exchange to decrease total revenue growth by two points. 

“Our outlook has many of the trends we saw in Q2 continue through Q3. Demand for our differentiated cloud and AI offerings across the Microsoft Cloud should drive another quarter of strong growth,” said Hood. 

For the full fiscal year, Microsoft expects double-digit growth in revenue and operating income.