Mar 19, 2025
Microsoft's Income Statement visualized Q2 FY25 (December 2024 quarter)

A look at Microsoft's latest quarter.
- đźš§ AI Growth vs. Capacity Limits: Azure AI services grew 157%, but Microsoft's cloud growth is constrained by data center shortages. Capacity constraints should ease by the end of FY25. For now, AI-driven demand is outpacing supply, limiting faster acceleration.
- đź’° Capex Soared 97% Y/Y to $23 billion: Microsoft is spending aggressively to expand AI infrastructure, expecting $80 billion in AI-related data centers this fiscal year. Some investors question whether this level of spending is necessary.
- 📉 Azure Growth Slowed Slightly: Azure's 31% Y/Y growth missed the high end of expectations and declined from 34% in Q1, showing some deceleration in cloud momentum. AI now contributed 13 percentage points to Azure’s growth.
- 🎮 Gaming Faced Industry Headwinds: Despite an extra two weeks of Activision revenue, gaming revenue declined 7% Y/Y, caused by broader hardware cycle challenges.
- 📊 Strong Bookings: Commercial bookings rose 67% Y/Y, driven by long-term Azure commitments from customers like OpenAI. Microsoft now has $300 billion in future service contracts yet to be recognized as revenue.
- đź”» Margins Under Pressure: Gross margin was 69%, flat Q/Q, while operating margin fell 2pp sequentially, reflecting higher AI-related costs.
- đź“… Guidance Suggests Steady Growth: Microsoft expects double-digit revenue and operating income growth in FY25, with Azure growth stabilizing at 31%-32% and Copilot driving M365 adoption.
What to watch looking forward
- đź§ The Evolution of AI Applications: Microsoft is betting on Copilot and its suite of AI-powered tools becoming the new standard for work. Will enterprises fully embrace AI at scale, or will adoption plateau once the novelty wears off? Early signs are positive.
- 🏗 AI Infrastructure Arms Race: The cloud computing giants are in an unprecedented spending cycle. Microsoft expects capacity to catch up by the end of FY25, but will its massive $80 billion investment prove to be a long-term moat, or will AI infrastructure become commoditized faster than expected?
- 💻 OpenAI Partnership & Model Innovation: Microsoft benefits from exclusive access to OpenAI’s models, but the arrival of competitive, low-cost AI alternatives like DeepSeek shows that OpenAI’s closed model could face disruption.
- 📢 AI Cost vs. Demand Trade-Off: If AI costs drop significantly, as Nadella suggested, will that fuel broader adoption—or erode pricing power? Investors should watch whether lower AI costs translate into more usage and monetization opportunities.
- 🔄 Reinvention of M365: Copilot adoption is strong, but Microsoft is pushing into AI agents and automation. Will these tools redefine productivity software the way Office once did, or are they just incremental upgrades?
- 🎮 Xbox’s Profitability Focus: Microsoft is shifting its gaming business toward higher-margin content and subscriptions, but can it sustain engagement in a weakening hardware cycle?
- ⚖️ Regulatory & Antitrust Watch: As AI and cloud computing become more central to business and government operations, Microsoft could face increasing scrutiny from regulators on competition and data privacy.
- 🌍 Global Expansion & Emerging Markets: With LinkedIn and Azure seeing strong growth in India, Brazil, and other regions, how much of Microsoft’s future depends on international expansion vs. US enterprise growth?
AI efficiency is rising, but the real test is whether it will fuel demand at a scale that justifies Microsoft’s massive CapEx bet.