Microsoft Q3 FY25 Earnings Report: Strong AI Momentum Propels Cloud Growth and Margin Expansion
Impressive Q3 FY25 Performance with Strong AI-Driven Growth Across Cloud and Productivity Segments
Microsoft reported a robust fiscal Q3 FY25, with revenue growing 13% year-over-year to $70.1 billion, beating expectations across all major business segments. The company’s performance was driven by strong cloud demand, particularly in Azure, which saw 35% constant currency growth, exceeding consensus expectations of 31.3%. The continued integration of artificial intelligence (AI) into Microsoft’s offerings helped fuel this growth, with AI-related workloads contributing significantly to both revenue and margin expansion. Microsoft’s AI-driven commercial business is expected to remain a key growth engine for the company moving forward.
Key Financial Highlights
Revenue: $70.1 billion, up 13% YoY
Operating Income: $28.3 billion, up 16% YoY
Operating Margin: 40.4%, up from 38.9% in Q3 FY24
Earnings Per Share (EPS): $2.48, up 17% YoY
Azure Revenue Growth: 35% YoY in constant currency
Microsoft Cloud Revenue: $42.4 billion, up 22% YoY in constant currency
AI-Driven Cloud Momentum and Margin Expansion
Azure was the standout performer in Q3, with 35% growth in constant currency, driven by both AI and non-AI workloads. The integration of AI into Microsoft’s cloud services has had a transformative impact, contributing 16 percentage points to Azure’s overall growth. This growth reflects both strong demand for Azure’s infrastructure and the increasing reliance on AI-powered applications across industries. Microsoft’s total commercial remaining performance obligations (RPO) rose 34% year-over-year, further indicating robust long-term demand.
Microsoft’s cloud business, encompassing Azure and other cloud services, reached a record revenue of $42.4 billion, growing 22% YoY in constant currency. The company continues to benefit from strong demand for its cloud platform, particularly as enterprises scale their AI capabilities. Gross margins and operating margins also improved during the quarter, with productivity gains from AI and strict cost control measures more than offsetting the costs of scaling cloud infrastructure.
Growth in Productivity and Business Processes
Microsoft’s Productivity and Business Processes segment generated $29.9 billion in revenue, up 10% YoY. This growth was driven by strong performances from Microsoft 365 Commercial and LinkedIn. The company saw continued strong adoption of its Microsoft 365 Copilot tools, which have been integrated into Office and Dynamics 365, while LinkedIn’s growing user base further contributed to the segment’s success. Commercial Office seat growth was particularly strong in small-to-medium-sized businesses (SMBs) and frontline worker tiers.
AI Expansion Across Microsoft’s Portfolio
AI continues to be a major growth driver for Microsoft, with the company scaling its AI capabilities across its entire product suite. GitHub Copilot reached over 15 million users, while Microsoft 365 Copilot is now used by hundreds of thousands of organizations. The company also introduced its unified data and analytics platform, Microsoft Fabric, which grew its customer base by 80% YoY. These initiatives underscore Microsoft’s commitment to AI and its strategic focus on expanding its AI-driven offerings across both enterprise software and cloud infrastructure.
Full-Year Guidance and Outlook
Looking ahead to Q4 FY25, Microsoft provided guidance that was ahead of expectations, projecting revenue between $73.2 billion and $74.3 billion, with Azure growth expected to remain robust at 34-35% in constant currency. Capital expenditures are expected to rise sequentially, reflecting the company’s ongoing investments in AI infrastructure to meet growing demand. Despite near-term concerns about PC inventory normalization and broader macroeconomic risks, Microsoft is executing exceptionally well across its cloud, AI, and enterprise software franchises.
Guidance for Q4 FY25
Revenue: Expected between $73.2 billion and $74.3 billion
Azure Growth: Expected to remain around 34-35% in constant currency
CapEx: Expected to rise sequentially
Here’s Our Take
Microsoft’s Q3 FY25 results reflect solid execution across its cloud and AI businesses, with the company continuing to benefit from strong demand for Azure and AI-driven solutions. The company’s ability to integrate AI into its cloud platform and enterprise software, combined with margin expansion and cost control, underscores its long-term growth potential.
For long-term investors, Microsoft remains a core holding, driven by its industry-leading cloud infrastructure, expanding AI portfolio, and solid execution across its business segments. While elevated capital expenditures for AI infrastructure may weigh on sentiment in the short term, these investments are strategically targeted at high-return areas with visible demand. The company’s growing AI-driven revenue streams, expanding margins, and strong financial performance position it for sustained growth in the years ahead.
Despite concerns about short-term macro risks and the impact of PC inventory normalization, Microsoft’s strong fundamentals, broad-based growth across cloud and AI, and disciplined cost management make it an attractive investment. We continue to recommend holding Microsoft in the portfolio and would consider adding to the position on any broader market weakness.