Microsoft Corp., a leading developer of computer software, operating systems, cloud computing, and artificial intelligence applications, in its Q2 earnings call discussed about strong AI performance but challenges in non-AI operations, with Copilot exceeding expectations in both seat growth and pricing. The company also discussed AI infrastructure optimization, while emphasizing how falling AI costs will drive broader adoption. The management highlighted new Copilot features including enterprise-wide Chat deployment and o1-powered capabilities, noting expansion from departmental to company-wide adoption. The company reported record commercial bookings growth of 75%, driven by OpenAI’s Azure commitments, strong core business performance, E5 suite momentum, and increased Azure commitments from both existing and new customers.
Microsoft delivered mixed performance, with earnings of $3.23 per share and revenue of $69.6 billion beating overall expectations. Azure’s cloud growth of 31% fell below the expected levels, while Commercial Cloud revenue of $40 billion missed analyst expectations. The company’s massive AI investments, including $22.6 billion in capital expenditures and plans for $80 billion in fiscal 2025, had raised concerns recently, particularly given competition from cheaper Chinese alternatives like DeepSeek. Microsoft also showed impressive AI business growth to $13 billion annual revenue, up 175% year-over-year. The quarter included a $2.29 billion expense for OpenAI investment losses and Cruise impairment charges, while the management’s revenue forecast of $67.7-68.7 billion fell below expectations, though commercial bookings remained strong.
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Financial/Operational Metrics:
- Revenue: $69.6 billion, up 12% YoY.
- Net Income: $24.1 billion, up 10% YoY.
- Diluted EPS: $3.23, up 10% YoY.
- Operating Income: $31.7 billion, up 17% YoY.
- R&D Expenses: $7.92 billion, up 11% YoY.
- Sales and Marketing Expenses: $6.44 billion, up 3% YoY.
Outlook:
- Q3 Revenue: $67.7-68.7 billion.
- Q3 Intelligent Cloud Revenue Growth: 19-20%.
- Q3 Azure Revenue Growth Projection: 31-32% in constant currency.
- Q3 and Q4 CapEx: Similar to Q2 levels, with FY26 expected to shift towards short-lived assets.
Analyst Crossfire:
- Azure Growth & Execution Issues (Keith Weiss – Morgan Stanley): Azure AI growth exceeded expectations, but non-AI Azure Consumption Revenue (ACR) faced execution issues due to adjustments in go-to-market strategy. Microsoft is fine-tuning sales and marketing strategies to balance AI and traditional cloud growth, with improvements expected in H2 (Amy Hood – CFO).
- AI Revenue Outperformance (Mark Moerdler – Bernstein): Strong AI revenue growth was driven by Azure AI and Microsoft Copilot. Copilot’s success came from increasing new and expanded seats, higher usage, and strong per-seat pricing, signaling high customer value (Amy Hood – CFO).
- AI Scaling & Cost Efficiency, OpenAI Partnership & CapEx Strategy (Brent Thill – Jefferies, Karl Keirstead – UBS): AI costs are decreasing due to software optimizations and advancements in AI scaling laws. Microsoft expects continued efficiency improvements, making AI more accessible and widely adopted. Microsoft remains committed to OpenAI but is focusing on a fungible infrastructure approach, balancing training and inference investments. The CapEx strategy prioritizes efficiency, continuous fleet upgrades, and revenue-driven scaling, ensuring long-term growth (Satya Nadella – CEO, Amy Hood – CFO).
- Copilot Expansion & AI Cost Efficiency (Brad Zelnick – Deutsche Bank): Microsoft is expanding Copilot’s reach with Copilot Chat, making AI-powered productivity tools more accessible. Lower inference costs are enabling wider adoption and improved features across M365, GitHub, and Security Copilot (Satya Nadella – CEO).
- Commercial Bookings Growth (Brent Bracelin – Piper Sandler): A record $39 billion sequential increase in Commercial RPO and 75% YoY bookings growth were driven by OpenAI’s Azure commitments, strong renewals, add-ons, and M365 E5 momentum. Growth came from both existing and new customers (Amy Hood – CFO).
- Proprietary vs. Open AI Models on Azure (Brad Reback – Stifel): Azure will support a mix of proprietary and open-source AI models. Microsoft is focusing on optimizing inference costs and latency while ensuring app developers can seamlessly integrate multiple models through the Foundry platform (Satya Nadella – CEO).
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