Azure is making a strong comeback, with Microsoft reclaiming its position as the AI powerhouse.
After the U.S. market closed on May 1 Beijing time, $Microsoft(MSFT.US) announced its Q3 FY2025 earnings report ending March. Overall, despite market pessimism about slowing revenue growth and contracting operating margins, the actual performance—accelerating revenue growth and expanding margins—was quite impressive. The core Azure business also outperformed expectations. Key highlights:
1. Azure Exceeds Expectations, Inflection Point Confirmed: The most-watched Azure business posted 33% YoY revenue growth (35% constant currency), accelerating by 2pp and 4pp QoQ, significantly beating market expectations of flat growth.
Pre-earnings, weak IT spending surveys and macro concerns led to low expectations for Azure, with consensus pushing back the timeline for a "reacceleration inflection point." This quarter’s beat and Q4 guidance of 34%-35% CC growth confirmed the inflection arrived earlier than expected.
2. AI Demand Strong, Non-AI Less Bad Than Feared: AI contributed 16pp to Azure growth (+3pp QoQ), the largest quarterly increase since Q2 2024. However, this was largely anticipated (consensus: 15.4%). The real surprise was non-AI traditional demand declining just 17% YoY (-1pp QoQ), beating the implied 14.7% consensus.
3. Copilot Fails to Deliver Hype: Microsoft 365 Commercial cloud revenue grew 12% (15% CC, flat QoQ), with seat growth steady at 7% YoY. Despite management’s claims of 10x cohort expansion for Copilot and surveys ranking it as a top-2 enterprise interest, results showed no material Copilot contribution, suggesting it remains niche.
4. Capex: Slowing Growth, Not Cuts: Q3 Capex was $21.4B (slightly down QoQ), reflecting moderation but still above $21B. Management reiterated FY25 guidance (~$86B) and FY26 growth (albeit slower), signaling continued investment rationalization—not retreat.
5. Leading Indicators Mixed: New contract bookings grew just 18% (17% CC), crashing from last quarter’s 67%, possibly due to OpenAI workload migration or macro softness. Remaining performance obligation (RPO) grew 34% YoY, but the 12-month executable portion slowed to 17%, raising concerns about near-term IT spend.
6. Margin Expansion Continues: Despite gross margin dipping 0.4pp YoY to 68.7% (better than feared), operating margin rose 1.1pp YoY as opex grew just 2.4% (below guidance). Operating profit grew 16%, outpacing revenue.
7. Solid Q4 Guidance: Revenue/operating profit guidance is 2.6%/2.8% above consensus, implying 13.9% revenue and 14.4% profit growth (helped by FX tailwinds). Azure CC growth is guided at 34%-35%, while Commercial M365 may slow to 14% CC.
Dolphin Research View:
Microsoft delivered a stellar quarter, smashing low expectations on Azure reacceleration and margin resilience. While Copilot remains underwhelming, Azure’s inflection validates AI Capex ROI—a positive read-across for semis. However, weakening leading indicators (bookings, short-term RPO) and FY26 margin pressure from sustained investments warrant caution. At ~30x FY25 PE (in line with history), shares aren’t cheap but could see near-term relief.
Earnings Deep Dive:
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Past Dolphin Research on MSFT:
Earnings Notes
Jan 30, 2025: Microsoft: Balancing Current Capex vs. Future AI Promise
Oct 31, 2024: Microsoft: AI Spending Without Revenue Payback
Disclosures: Dolphin Research Disclaimer
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