Microsoft's (MSFT.US) Q2 revenue and EPS surpassed expectations, but cloud growth is anticipated to decelerate, and its significant AI investment has been called into question.

Microsoft MSFT.US reported its fiscal second-quarter 2025 results after the close of trading on Wednesday, showing total revenue grew 12% year-on-year to $69.6bn, topping the $68.9bn expected by the market; and earnings per share of $3.23, topping the $3.12 expected by the market.Microsoft said the 13 percentage points of growth in its Azure cloud division in the second quarter was due to artificial intelligence, up from 12 percentage points in the first quarter. The company said the quarter's AI revenue was equivalent to an annualized $13bn.Microsoft said its cloud business would continue to slow in the current quarter as the company struggles to build enough data centers to meet demand for its AI products.Microsoft expects Azure to grow by up to 32% in the third quarter, little faster than the 31% growth in the last three months of 2024. Microsoft fell about 5% in after-hours trading.The software maker is seen as a leader in commercializing AI products, thanks to its close ties with OpenAI, the maker of ChatGPT. Last year, Microsoft launched a series of AI assistants under the copilot brand, but their monetization has taken longer than some investors had hoped.Microsoft said its Azure AI services grew 157%. But Amy Hood, the company's chief financial officer, said it still did not have enough data center capacity to meet customer demand, hurting overall sales in its key cloud division. She told investors the capacity constraints should be lifted by the end of the current fiscal year.She said the company had nearly $30bn of commercial services contracts, which Microsoft must provide in the future but has not yet recognized as revenue.She said demand remained strong, with commercial bookings, a measure of future revenue, up 67%, "far exceeding" Microsoft's expectations. Hood attributed this to OpenAI's commitment to Azure.Microsoft, like its cloud rivals Google and Amazon, has invested record amounts in AI, mainly in chips and data centers to support the power-hungry AI services. Microsoft said it expects to spend $80bn on AI data centers this fiscal year. Wall Street has begun to question the massive spending, especially after China's DeepSeek released a new open-source AI model that claims its capabilities can rival those of US technology at a fraction of the cost.Microsoft said its capital expenditure in the second quarter was $22.6bn, topping analysts' expectations of about $21bn. Infrastructure spending hurt cloud business margins.The company said it expects to spend $30bn on capital expenditure in the third quarter, up from $22.6bn in the second quarter.