Microsoft Q2 2025 Earnings Preview: 5 Things To Know

DeepSeek, Stargate, Azure and Copilot are expected topics for Wednesday.

The effects of DeepSeek and Stargate. Customer spending on Azure and artificial intelligence justifying growing capital expenditures. And a potential wave of Windows PC sales.

These are some of the top items slated to come up Wednesday when Redmond, Wash.-based tech giant Microsoft reports its second fiscal quarter earnings, covering the three months ended Dec. 31.

Financial analyst firms differed on whether they thought Microsoft will beat Wall Street’s expectations. In a Monday report, analyst firm Bernstein predicted second fiscal quarter revenue of $69.1 billion, ahead of Wall Street consensus of $69 billion. Bernstein predicts operating income of $30.8 billion, ahead of Wall Street consensus of $30.2 billion and above Microsoft’s topline guidance of $30.5 billion.

[RELATED: Microsoft 365 Copilot Chat Brings Consumption Model To AI Agents]

KeyBanc, meanwhile, said to expect second quarter revenue of $68.2 billion, representing 10 percent growth year over year. The firm also predicted operating income for the quarter of $29.8 billion.

Here’s more of what to expect during Wednesday’s quarterly earnings report from Microsoft.

DeepSeek, Stargate, AI CapEx

Analysts on Wednesday's call will likely seek comments from Microsoft’s leadership on how some of this week’s biggest headlines affect the vendor’s artificial intelligence business, asking about free Chinese-made AI chatbot DeepSeek and the Stargate initiative of upwards of $500 billion in AI infrastructure spending.

At least one analyst firm played down the implications of DeepSeek suddenly capturing the world’s attention–even eliciting public remarks from President Donald Trump–for its claim that its training only cost $6 million and used lower-quality chips. DeepSeek caused an investor flurry that saw Nvidia lose about $600 billion of market value, the biggest one-day loss in U.S. history, according to the BBC.

DeepSeek’s advancement could bode well for AI vendors including Microsoft, assuming those vendors can implement the same advancements and cost-saving strategies as DeepSeek, according to reports this week from Morgan Stanley.

Microsoft CEO Satya Nadella has said the vendor plans to spend $80 billion on capital expenditures this fiscal quarter, much of that for AI. And the vendor’s investment in its Phi small language models (SLMs) to cut down on AI costs signals Microsoft’s focus on cost efficiency over building the most-intelligent frontier model, according to Morgan Stanley.

As for the Stargate partnership involving Microsoft-backed ChatGPT creator OpenAI, Microsoft cloud and AI rival Oracle and investment firm SoftBank, analysts may seek clarification around Microsoft’s relationship to Stargate and OpenAI.

Microsoft revealed earlier this month that it and OpenAI made a new agreement that gives OpenAI the ability to seek other capacity sources with Microsoft holding a right of first refusal (ROFR). Microsoft and OpenAI’s new agreement through 2030 gives Microsoft access to OpenAI intellectual property (IP) for use within Copilot, exclusivity on OpenAI application programming interfaces (APIs) and other benefits with a revenue sharing agreement.

A quarterly survey of CIOs showed that 95 percent of respondents expect to adopt Microsoft generative AI products over the next 12 months, up from 63 percent a year ago, according to Morgan Stanley. And 97 percent of CIOs plan to utilize Microsoft's AI products over the next three years.

Azure Acceleration Hopes

The tech world is watching for new details from Microsoft on how Azure’s revenue is accelerating against larger capital expenditures to meet the needs of the AI era.

Microsoft also saw a ramp up in CapEx to meet cloud needs before a major decrease in spending, which is expected for AI as well, Bernstein said in a report Monday. The investment firm expects Azure should grow 32 percent for the quarter and 36 percent growth next quarter, both ahead of Wall Street consensus.

Azure instances increased about 17 percent quarter over quarter and 28 percent year over year in 2024’s final quarter, according to a KeyBanc report Friday. However, most of those instances came from increased central processing unit (CPU) offerings, likely not Azure AI revenue. Nvidia Azure instances held steady, but saw the lowest sequential growth in almost three years.

The increases came with the launch of Microsoft Azure Cobalt CPUs, Intel CPUs and Advanced Micro Devices (AMD) CPUs, according to KeyBanc. KeyBanc predicts $18.25 billion in Azure revenue for the quarter, above Wall Street consensus.

More VARs called Azure a likely recipient for increased spend by Microsoft customers, according to a quarterly survey by KeyBanc. Azure received 82 percent of responses compared to 74 percent the prior quarter.

A recent survey of Microsoft Azure channel partners showed positive activity in the quarter thanks to “favorable exposure to upper mid-market/enterprise organizations which remain early in their cloud migrations, improving offering and packaging of its data solutions (including Fabric), and AI partnerships – particularly concerning OpenAI Services,” according to Morgan Stanley.

The firm’s quarterly CIOs survey showed that respondents prefer Azure to Amazon Web Services for public cloud. CIOs said that more than 50 percent of app workloads reside in Azure today compared to 33 percent in AWS.

More than 40 percent of CIOs said they expect to use Azure OpenAI Service over the next 12 months, according to the survey.

Copilot Chat, M365 Upgrades, AI Agents

Microsoft CEO Satya Nadella might have thoughts to share on the vendor’s latest AI product business model, Copilot Chat, which brings consumption and spending against Microsoft Azure Consumption Commitment (MACC) to the emerging AI agents field.

Copilot Chat could be “an attractive on-ramp to the seat-based Microsoft 365 Copilot for enterprises, particularly in scenarios where adopting the full Microsoft 365 Copilot right away is cost prohibitive,” Morgan Stanley said in a report this month. Copilot Chat autonomous agents enter paid preview on Feb. 1.

Morgan Stanley also found that Microsoft is the top vendor for customers to leverage for AI agent strategies, which is positive news as the era of autonomous AI programs takes off.

On the downside, slower Copilot adoption and moderating Microsoft 365 license upgrades could prove trouble for the vendor, according to Morgan Stanley. Thirty percent of CIOs use E5, up from 27 percent the prior quarter. But only 11 percent of CIOs who use M365 today plan to upgrade to E5 in the next 12 months, down from 22 percent the prior quarter.

CIOs report 17 percent in expected Microsoft 365 Copilot penetration across their organizations over the next 12 months, growing to 38 percent penetration over the next three years, according to Morgan Stanley data. However, that is a decrease from the prior survey.

The firm predicts $2.6 billion in M365 Copilot revenue for Microsoft in fiscal year 2025 and $6.1 billion in revenue the following fiscal year. That represents 8 percent penetration and 18 percent penetration, respectively.

More VARs see Microsoft Copilot offers in production, up to 13 percent in KeyBanc’s latest quarterly survey compared to 6 percent the prior quarter. VARs reported that the main inhibitors to Copilot adoption were cost, security and lack of use cases.

Customers upgrading their licenses–which can be due to the efforts of Microsoft solution providers–is more of a contributor to M365 average revenue per user (ARPU) compared to Copilot for now, according to Morgan Stanley.

Microsoft’s software-as-a-service Copilot offer excluding GitHub could have a revenue run rate between $800 million and $1.2 billion, according to a Bernstein report Monday.

Bernstein predicted $29 billion in second fiscal quarter revenue for Microsoft’s “productivity and business processes” segment, ahead of Wall Street consensus of $27.6 billion. This segment includes Microsoft 365 Commercial products, M365 Consumer products, LinkedIn and Dynamics.

AI PC Wave

Analysts could seek more color from Microsoft leaders on potentially higher PC buying this year with AI PCs on the market and Windows 10 end of support slated for October. Solution providers have told CRN that AI PC enthusiasts still look for a killer app to justify higher prices.

Earlier this month computer makers showed off their latest AI PC offerings at CES 2025. International Data Corp. reported that PC shipments in the last quarter of 2024 grew 1.8 percent from the prior year with global volumes reaching 68.9 million shipments. Gartner predictedthat IT devices spending will reach $810 million in 2025, up 10.4 percent year over year.

Optimism from the channel might not yet translate into dollars, at least for Microsoft. At least two analyst firms, KeyBanc and Bernstein, predicted Microsoft’s “more personal computing” segment–which includes revenue from Windows OEMs, devices, video games and news advertising–to come in below Wall Street expectations, coming in around $14 billion for the quarter.

Battles In Security

Wednesday’s call will give Microsoft leadership a chance to show analysts whether the tech giant has taken share in security, selling itself as a security platform where customers can consolidate spend, or whether it sees strong competition from point solutions and other security vendors.

VARs ranked Microsoft high as a continued strategic consolidation play in security, a cloud security vendor, an endpoint security vendor and a consolidator of identity and access management (IAM) spend, according to a KeyBanc report Friday.

More than 50 percent of VAR respondents said Microsoft security should see increased spending, more than Office 365 and Teams and tied with AI.

Microsoft battles with the likes of Palo Alto Networks in security platform consolidation, CrowdStrike in endpoint security, Wiz in cloud security and Okta in IAM.

Microsoft channel partners have reported that customers seeking to improve security postures–as well as get ready for AI–helped fuel activity around upgrades to Microsoft’s E5 licenses, according to a Morgan Stanley report earlier this month.

On the security AI front, a Morgan Stanley survey of chief information officers (CIOs) showed executives planning to adopt Microsoft’s Security Copilot product–with 7 percent of respondents saying the plan to increase uptake of Security Copilot in the next 12 months and 38 percent planning to increase uptake in the next three years.

The firm reported a growing interest in Microsoft’s data governance tool Purview, perhaps spelling competition for Varonis and other competitors.

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