Microsoft Q3 Earnings: Cloud, AI, and CapEx Drive a Robust Rebound

Microsoft delivered a blowout third-quarter fiscal 2025 earnings report, sending its stock soaring 8% in after-hours trading. The strong print was driven by accelerating demand for Azure cloud services, impressive monetization of artificial intelligence (AI) offerings, and a reaffirmation of its long-term capital expenditure (CapEx) ambitions. While investors had approached the quarter with some caution due to macro volatility and fears of CapEx fatigue, the company decisively beat expectations across key metrics, reasserting its leadership in enterprise technology and AI infrastructure.

Headline Results and Key Beats

Microsoft reported Q3 revenue of $70.1 billion, up 13% year-over-year and well ahead of the $68.4 billion consensus. Earnings per share came in at $3.46, a solid beat over the expected $3.22. Operating income rose to $32 billion, beating estimates by more than $1.5 billion, and net income reached $25.8 billion. Importantly, growth wasn’t limited to one division: all three core segments—Intelligent Cloud, Productivity & Business Processes, and More Personal Computing—beat expectations and exceeded prior guidance.

Cloud was once again the growth engine. Total Microsoft Cloud revenue grew 20% to $42.4 billion, slightly above estimates, while Azure and other cloud services surged 33% in constant currency—above the 31% forecast. CEO Satya Nadella emphasized that demand for AI services continues to scale faster than anticipated, with AI now contributing 16 percentage points to Azure’s growth, compared to 13 points in the December quarter and 12 in September. This implies AI-related Azure revenue is growing well above 100% year-over-year.

Intelligent Cloud Revenue:

AI and Data Center Commentary

Microsoft’s performance is a powerful endorsement of hyperscale AI infrastructure. CapEx totaled $16.75 billion in the quarter, above consensus, while total equipment-related expenditures including finance leases reached $21.4 billion. CFO Amy Hood guided for an increase in Q4 CapEx to support AI workload deployment. Notably, Microsoft reiterated its expectation to surpass $80 billion in full-year CapEx for FY25 and confirmed it would sustain a high pace of investment into FY26, albeit at a slower growth rate. This mirrors Meta’s similar upward revision to AI CapEx, reinforcing bullish sentiment across the broader AI infrastructure complex.

A key takeaway was Microsoft’s announcement of Majorana-1, its in-house quantum chip that aims to eventually support utility-scale quantum computing. While still early, the announcement underscores Microsoft’s ambitions to vertically integrate and own more of the AI technology stack, from chips to cloud to application services.

Productivity and Copilot Drive Engagement

Productivity and Business Processes revenue rose 10% to $29.9 billion, ahead of guidance. Microsoft 365 continues to show strong demand, with commercial cloud revenue up 12% (15% in constant currency). Paid commercial seats rose 7% to over 430 million, led by small business and frontline worker adoption. More critically, Copilot usage tripled over the past year, with over 230,000 organizations now using Copilot Studio.

Average revenue per user (ARPU) is expanding as customers migrate to higher-tier E5 plans and integrate AI features. Nadella highlighted growing enterprise appetite for copilots not just in productivity apps but across developer tools and customer service solutions.

More Personal Computing and Gaming Growth

More Personal Computing revenue came in at $13.4 billion, up 6% year-over-year and ahead of the $12.8 billion high-end of guidance. This outperformance was partially driven by higher PC inventory levels ahead of potential tariffs and modest improvement in OEM demand. Gaming saw a rebound as well, with Xbox content and services up 8% and PC Game Pass growing 45% year-over-year. Microsoft noted that Q3 saw more than 150 million cloud gaming hours and teased upcoming gaming integrations with generative AI through Copilot tools.

Commercial Bookings and Backlog Strengthen

Commercial bookings surged 18%, helped by large Azure commitments—including one from OpenAI. Remaining performance obligations (RPO) reached $315 billion, with 40% expected to be recognized in the next 12 months. These strong backlog metrics point to continued visibility and resilience in Microsoft’s commercial business despite macro crosscurrents.

Free cash flow for the quarter was $20.3 billion. Cash, cash equivalents, and marketable securities rose to $70.2 billion. Share repurchases totaled $13.4 billion, and dividends reached $1.3 billion. Headcount also rose to 76,834, up 11% year-over-year, indicating continued investment in engineering and go-to-market capabilities.

Forward Guidance and Investor Reaction

Guidance for the fourth quarter calls for total revenue of $73.15–$74.25 billion, well above the $72.2 billion consensus. Microsoft expects Intelligent Cloud revenue of $28.75–$29.05 billion, with Azure growing 34–35% in constant currency, again accelerating versus prior quarters. Productivity and Business Processes is expected to reach $32.05–$32.35 billion, and More Personal Computing revenue is guided to $12.35–$12.85 billion.

While cloud gross margins are expected to compress slightly to 67% due to continued AI investments, management noted that efficiency improvements in GPU deployment and power usage are offsetting some of the cost pressures. Microsoft has also made progress in shortening the time between hardware dock and deployment by 20%, helping to better match AI capacity with demand.

Final Thoughts

Microsoft’s Q3 results put to rest near-term concerns about slowing cloud demand or runaway CapEx spending. With AI-related cloud revenue rising over 100% and a bullish Q4 outlook, the company reaffirmed its position at the center of the AI transformation. Nadella’s message was clear: Microsoft’s AI infrastructure is scaling globally and more efficiently, with strong enterprise adoption trends across its platform.

Investors responded enthusiastically, sending the stock up nearly 9% after hours and sparking a broader rally in AI infrastructure names. With hyperscalers like Meta and Microsoft doubling down on AI CapEx, confidence is growing that this spending cycle still has legs—and Microsoft looks poised to remain one of its biggest winners. Watch: What to Expect From Apple’s Earnings Call