TLDR
- Microsoft delivered Q2 earnings of $4.14 per share and $81.3 billion revenue, beating forecasts but stock dropped 6.8% after hours
- Azure cloud platform revenue growth slowed to 39% from previous quarter’s 40%, sparking investor concerns about momentum
- The tech giant invested $37.5 billion in AI infrastructure during the quarter, a 66% year-over-year increase
- M365 Copilot reached 15 million paying subscribers, marking the first time Microsoft disclosed usage figures for the AI tool
- OpenAI represents 45% of Microsoft’s $625 billion commercial backlog, highlighting concentrated partner risk
Microsoft reported better-than-expected fiscal second-quarter results Wednesday night but couldn’t escape a sharp stock decline. Shares fell 6.8% in extended trading despite surpassing analyst projections.
The software giant posted adjusted earnings of $4.14 per share with revenue hitting $81.3 billion. Wall Street anticipated $3.91 per share and $80.3 billion in revenue. The beat looked impressive on the surface.
But traders zeroed in on cloud momentum and spending patterns. Azure revenue climbed 39% during the quarter. That topped the 37.8% consensus but showed deceleration from the prior period’s 40% expansion.
Market participants are scrutinizing Azure performance as the company’s key growth driver. Any sign of slowdown triggers concern about future earnings potential. The sequential decline raised red flags for some institutional investors.
CFO Amy Hood guided third-quarter Azure growth to land between 37% and 38% in constant currency. The forecast aligned with the 37.6% Street estimate but pointed to further deceleration. She also projected total revenue with an $81.2 billion midpoint, matching analyst expectations.
AI Investment Hits Record Levels
Capital spending totaled $37.5 billion for the three-month period. This marked a 66% surge from the same quarter last year. The majority funded computing chips and infrastructure for artificial intelligence applications.
Analysts had modeled $34.31 billion in capital expenditures. Microsoft exceeded that figure by more than $3 billion. The gap prompted questions about return on investment timelines.
Revenue increased 17% while cost of revenue jumped 19%. This margin compression worried investors watching profitability metrics. The company has poured over $200 billion into AI technology since fiscal 2024 started.
CEO Satya Nadella shared M365 Copilot subscriber counts for the first time. The AI assistant has attracted 15 million annual users at $30 per month. Microsoft positioned this as validation that enterprise customers are adopting AI tools.
Partner Concentration Draws Attention
The OpenAI partnership delivered mixed signals. Microsoft’s “Other” business segment generated $10 billion in income versus a $2.3 billion loss last year. Accounting changes related to its 27% OpenAI stake drove the improvement.
Commercial remaining performance obligations doubled to $625 billion year-over-year. OpenAI accounted for 45% of this total. The startup committed to spending at least $281 billion with Microsoft long-term.
Strip out OpenAI and cloud backlog grew 28%. That includes a $30 billion agreement with Anthropic. The concentration risk sparked debate among analysts about diversification needs.
Competition from Google’s Gemini model is intensifying. Google secured Apple as a major AI customer recently. This challenged Microsoft’s first-mover advantage in the space.
Hood indicated capital spending will dip slightly in the current quarter. She cautioned that rising memory chip prices will squeeze cloud margins ahead. Overall quarterly revenue rose 17% to $81.3 billion, beating the $80.27 billion estimate.
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