Microsoft Reports Slower Growth in Cloud Services
Microsoft shares dropped by as much as 5% in extended trading following the company’s fiscal second-quarter earnings report, which revealed slower-than-expected growth in its Azure cloud computing division. Although the tech giant exceeded analysts’ expectations in earnings and revenue, its weaker-than-anticipated forecast for the upcoming quarter concerned investors.
In the fiscal second quarter, Microsoft posted earnings per share of $3.23, surpassing the expected $3.11, while revenue stood at $69.63 billion, ahead of the projected $68.78 billion. However, for the fiscal third quarter, Microsoft’s finance chief, Amy Hood, provided revenue guidance in the range of $67.7 billion to $68.7 billion, falling short of the $69.78 billion consensus from analysts. The company’s revenue increased by 12.3% year-over-year, marking its slowest growth since mid-2023, while net income rose to $24.11 billion from $21.87 billion in the same quarter last year.
Microsoft’s Intelligent Cloud segment, which includes Azure, generated $25.54 billion in revenue, reflecting a 19% increase but missing the estimated $25.83 billion. Revenue from Azure and other cloud services grew by 31%, a slight decline from 33% in the prior quarter. CEO Satya Nadella highlighted the company’s $13 billion annualized revenue run rate for artificial intelligence (AI), with AI-driven growth contributing 13 percentage points to Azure’s expansion. However, Hood expects Azure’s growth to range between 31% and 32% in the fiscal third quarter, trailing the analyst consensus of 33.4%.
Mixed Performance Across Business Segments
Microsoft Shares surged as the Productivity and Business Processes segment, which includes Office 365 subscriptions and LinkedIn, reported revenue of $29.44 billion, marking a 13.9% increase and exceeding the consensus estimate of $28.89 billion. The More Personal Computing unit, responsible for Windows, Bing, Surface, and Xbox, recorded $14.65 billion in revenue, slightly above analysts’ expectations of $14.29 billion. Sales of Windows operating system licenses from device manufacturers rose by 4%, aligning with Gartner’s report indicating a 1.4% increase in PC shipments during the quarter.
Despite strong performance in some areas, Microsoft faced financial headwinds. The company reported a $2.29 billion loss in its “other expense” category, exceeding Hood’s previous projection of $1.5 billion. This was primarily attributed to impairment charges related to Microsoft’s investment in Cruise, a subsidiary of General Motors, which was discontinued. Additionally, Microsoft’s ongoing investment in OpenAI, now totaling nearly $14 billion, added to its expenses.
Strategic Moves and Market Challenges
Microsoft Shares have continued to gain momentum as the company focuses on AI-driven growth, recently investing an additional $750 million into OpenAI. During the fiscal second quarter, the company introduced the Windows 365 Cloud Link, a cloud-based PC solution for businesses, and expanded AI capabilities on GitHub by integrating models from Anthropic and Google.
However, Microsoft faces increasing competition in the AI sector. Investors reacted cautiously after DeepSeek, a Chinese AI lab, introduced an open-source model that reportedly trained at significantly lower costs than U.S. competitors. DeepSeek’s latest AI model, R1, has shown promising results in outperforming OpenAI’s models in certain tests. Notably, this model is now accessible through Microsoft’s Azure AI Foundry and GitHub and will soon be compatible with Copilot+ PCs.
Capital expenditures for the second quarter reached $15.80 billion, slightly above analysts’ estimates. Hood indicated that capital spending levels would remain similar in the third and fourth quarters before slowing in the 2026 fiscal year. Microsoft’s absence from a recent White House press conference about the Stargate AI infrastructure project, which could see up to $500 billion in investment, raised some questions about its role in the AI sector’s future.
Prior to the earnings announcement, Microsoft shares had gained 5% in 2025, outperforming the S&P 500’s 3% growth. However, concerns over slowing cloud revenue and increasing competition in AI weighed on investor sentiment, leading to the recent decline in the company’s stock price.
