Microsoft shares tumbled by as much as 5% in after-hours trading following the release of its fiscal second-quarter 2025 results. While the tech giant exceeded Wall Street expectations for earnings per share and revenue, its Azure cloud computing services saw slower growth than analysts had anticipated. This marks the slowest growth in Azure since mid-2023, raising questions about Microsoft’s growth trajectory as it faces competition and execution challenges in its cloud business.
Key Financial Highlights for Q2 2025
Microsoft’s Q2 results for the fiscal year 2025 showed mixed performance. The company reported earnings per share (EPS) of $3.23, surpassing analyst estimates of $3.11. Revenue came in at $69.63 billion, above the consensus of $68.78 billion. However, Microsoft’s guidance for Q3 revenue came in below Wall Street expectations, with projections of $67.7 billion to $68.7 billion, compared to the consensus estimate of $69.78 billion.
- Earnings per share: $3.23 (vs. $3.11 expected)
- Revenue: $69.63 billion (vs. $68.78 billion expected)
- Net income: $24.11 billion (up from $21.87 billion in Q2 2024)
Despite the mixed financial results, Microsoft’s revenue growth of 12.3% year-over-year in Q2 remains a solid performance, although it marks the company’s slowest growth rate since mid-2023.
Slower Azure Growth Weighs on Outlook
One of the most significant takeaways from Microsoft’s earnings report is the slowdown in Azure’s growth. The company’s Intelligent Cloud segment, which includes Azure, generated $25.54 billion in revenue, a 19% increase year-over-year. However, this growth fell short of the $25.83 billion consensus. Azure’s revenue growth rate slowed to 31% from the previous quarter’s 33%, and Microsoft now forecasts a growth range of 31% to 32% for Q3, lower than the 33.4% growth expected by analysts.
The slower-than-expected cloud growth can be attributed to a combination of factors, including capacity constraints and execution challenges, which have hampered Microsoft’s ability to meet demand in the highly competitive cloud market. Despite these obstacles, Microsoft remains optimistic about the future of Azure and its artificial intelligence (AI) investments.
AI Gains Drive Growth: Microsoft’s Focus on Artificial Intelligence
Artificial intelligence continues to be a key growth driver for Microsoft, contributing 13 percentage points to the company’s overall growth in Q2 2025. The company recently highlighted its $13 billion annualized revenue run rate for AI, underscoring its growing presence in the rapidly evolving sector. CEO Satya Nadella pointed out that AI models are playing an increasingly central role in Microsoft’s product offerings, including Azure, GitHub, and Windows.
In addition to its own AI developments, Microsoft has significantly invested in OpenAI, with another $750 million injected into the company during the quarter. Nadella emphasized that OpenAI has much more to reveal soon, signaling the importance of this partnership in driving Microsoft’s AI strategy forward.
Microsoft’s Productivity and Business Segments Show Resilience
While Azure’s growth slowed, Microsoft’s other key business units performed relatively well in Q2. The Productivity and Business Processes segment, which includes Office software subscriptions and LinkedIn, posted $29.44 billion in revenue, growing 13.9% year-over-year and surpassing analyst expectations.
The More Personal Computing segment, which encompasses Windows, Bing, Surface, and Xbox, generated $14.65 billion in revenue. This figure remained flat compared to the previous year but still exceeded analyst estimates. A 4% rise in sales of devices and Windows operating system licenses from device makers helped drive this stability.
Challenges and Investments: Microsoft’s Strategy Moving Forward
Despite the mixed financial results, Microsoft remains committed to strengthening its position in both the cloud and AI markets. The company plans to revamp its sales function to better adapt to market conditions, particularly as customers balance AI workloads with ongoing cloud migration efforts.
Additionally, Microsoft has continued to invest heavily in emerging technologies. The company’s Windows 365 Cloud Link, which allows corporate workers to access applications and files stored in the cloud, and GitHub’s AI-powered programming chatbot, are examples of how Microsoft is integrating AI into its products and services to stay ahead of the curve.
However, challenges remain. Microsoft’s investment in OpenAI, which now totals nearly $14 billion, continues to drain resources. Furthermore, an impairment charge from the company’s investment in Cruise, the autonomous vehicle company, negatively impacted its “other expense” line, contributing to a larger-than-expected expense for the quarter.
Looking Ahead: What’s Next for Microsoft in Q3 and Beyond?
Microsoft’s Q3 outlook suggests slower growth compared to Wall Street expectations. While the company anticipates Azure growth in the 31% to 32% range at constant currency, this is a dip from previous forecasts. The company is also focusing on improving its sales strategy and addressing capacity constraints to better capitalize on cloud demand.
Looking beyond Q3, Microsoft will continue to lean into its AI investments and cloud business. The company’s focus on AI is evident in its recent announcements, including its collaboration with OpenAI and the expansion of AI tools on GitHub. As competition in the cloud and AI markets intensifies, Microsoft’s ability to execute on these fronts will be crucial to maintaining its growth trajectory.
Microsoft’s Future in Cloud and AI
Despite slower-than-expected Azure growth, Microsoft’s Q2 2025 performance highlights the company’s strong positioning in the AI and cloud computing sectors. The company’s continued investments in artificial intelligence and cloud services, coupled with its focus on adapting to market conditions, will be key to navigating challenges in the coming quarters. As Microsoft drives innovation in AI and expands its product offerings, it will need to address its growth challenges head-on to maintain its competitive edge.