Microsoft Q2 2025 Earnings: CFO Blames Azure ‘Challenges’ On Partner Motion; AI Sales Beat Expectations

During Wednesday’s quarterly earnings call, Microsoft CFO Amy Hood said that non-AI Azure sales saw ‘go-to-market execution challenges’ in the vendor’s ‘scale motion,’ adding that ‘primarily, these are customers we reach through partners and through more indirect methods of selling.’

Microsoft CFO Amy Hood (pictured) partly blamed the partner sales motion for Azure’s performance in the vendor’s most recent fiscal quarter while also highlighting positive momentum in license upgrades—an area solution providers help with—and artificial intelligence.

During Wednesday’s quarterly earnings call for the three months ended Dec. 31, the Redmond, Wash.-based vendor’s CFO said that non-AI Azure sales saw “go-to-market execution challenges” in the vendor’s “scale motion.” Hood said that “primarily, these are customers we reach through partners and through more indirect methods of selling.”

Hood attributed the challenges to the time it took to implement changes made in the summer— Microsoft’s fiscal year started July 1—around balancing work with customer AI workloads and work with migrations and other fundamentals.

“As you do that, you learn with your customers and with your partners on sort of getting that balance right between where to put our investments, where to put the marketing dollars, and importantly, where to put people in terms of coverage and being able to help customers make those transitions,” she said.

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Microsoft Q2 Earnings

Hood told analysts on the call that Microsoft is “going to make some adjustments to make sure we are in balance because when you make those changes in the summer, by the time it works its way through the system, you can see the impacts and whether you have that balance right.”

Although “the teams are working through that” and are “already making adjustments,” Hood said to expect “impact” through the second half of Microsoft’s fiscal year.

“When you work through the scale motion, it can take some time for that to adjust,” she said. “I feel good that the teams understand and are working through that.”

CRN has reached out to Microsoft for further comment.

Other Azure Challenges

Along with issues executing in the partner motion, Hood blamed foreign exchange rates and “lower-than-expected” on-premises server and enterprise services revenue for the quarterly Azure performance.

Microsoft’s “intelligent cloud” segment, which includes Azure revenue, saw $25.5 billion in revenue during the quarter. That’s a 19 percent increase year over year.

Within this segment, server products and cloud services revenue grew 21 percent year over year. Azure and other cloud services revenue grew 31 percent. Azure AI services attributed 13 points to this growth.

Server business revenue decreased 3 percent, “slightly below expectations, driven by slower, unexpected purchasing around Windows Server 2025 launch,” Hood said. “Enterprise and partner services revenue decreased 1 percent, below expectations, with lower-than-expected performance across enterprise support services and industry solutions.”

Microsoft Chairman and CEO Satya Nadella added that the vendor saw a good ratio for storage, data services and app services underneath AI workloads and that VMware migration work was “in good shape.”

Nadella said the vendor is working to “tweak the incentives, go-to-market” in the scale motion.

“At a time of platform shifts, you kind of want to make sure you lean into even the new design wins so you just don’t keep doing the stuff that you did in the previous generation,” Nadella said. “You would rather win the new than just protect the past.”

Positive E5, Microsoft AI Momentum

Good news in the quarter came from increased license upgrades to E5 licenses, work sometimes done by Microsoft solution providers.

Paid M365 Commercial seats grew 7 percent year over year. M365 Commercial products revenue increased 13 percent, “significantly ahead of expectations, driven by higher-than-expected transactional purchasing with the launch of Office 2024 as well as the Windows Commercial on-premises components from the better-than-expected performance of M365 suite,” Hood said.

Microsoft’s AI business surpassed a $13 billion annual revenue run rate, more than double year over year and more than the $10 billion-plus Microsoft predicted the prior quarter.

Azure AI services saw “better-than-expected results,” more than doubling year over year, Hood said. She credited “operating teams pulling in some delivery dates, even by weeks.”

She said the vendor continues to be capacity-constrained, seeing more AI demand than it can meet. “You have to have space, which I generally call long-lived assets, right—that's the infrastructure and the land,” Hood said.

“We have been short power and space. And so as you see those investments land that we’ve made over the past three years, we get closer to that balance by the end of this year,” she said. “And so the confidence on the AI side continues to be there in terms of being able to sell, utilize and be, I think, encouraged by the signals.”

Nadella shared updated user metrics around some of Microsoft’s products during the call, including:

  • 19,000 paid Microsoft Fabric customers, making Fabric “the fastest-growing analytics product in our history.”
  • Power BI has more than 30 million monthly active users, up 40 percent since last year.
  • The number of Azure OpenAI applications running on Azure databases and Azure App Service more than doubled year over year.
  • More than 200,000 monthly active users on Azure AI Foundry.
  • Microsoft’s Phi family of small language models (SLMs) has been downloaded more than 20 million times.
  • GitHub Copilot in Visual Studio (VS) Code has more than 1 million sign-ups.
  • GitHub is home to 150 million developers, up 50 percent over the past two years.
  • Customers who purchased Copilot during the first quarter of availability have expanded their seat counts collectively more than tenfold over the past 18 months.
  • The number of people who use Copilot daily more than doubled quarter over quarter.
  • Copilot usage intensity increased more than 60 percent quarter over quarter.
  • More than 160,000 organizations have already used Copilot Studio, collectively creating more than 400,000 custom agents in the last three months alone, more than double quarter over quarter.
  • Microsoft’s bridge data cloud grew more than 25 percent year over year and adds every day billions of emails, documents and chats; hundreds of millions of Teams meetings, and millions of SharePoint sites.
  • DAX Copilot surpassed 2 million monthly physician patient encounters, up 54 percent quarter over quarter.
  • 15 percent of premium-price laptops sold in the U.S. over the winter holidays were Copilot+ PC.
  • Customers now use Microsoft Purview to audit more than 2 billion Copilot interactions for safe and compliant use.

DeepSeek ‘Good News’ For Microsoft

When asked on the call about DeepSeek, the Chinese AI lab that wowed AI users this week with a powerful model possibly built for less capital than expected, Nadella said AI is seeing the benefits of any compute cycle, with optimizations bringing down costs, and called the powerful model capable of running locally “good news” for Microsoft as a hyperscaler and PC platform provider.

“DeepSeek has some real innovations,” Nadella said. “Obviously, now that all gets commoditized. And it’s going to get broadly used. And the big beneficiaries of any software cycle like that is the customers, right?”

Just before Wednesday’s call, Microsoft revealed in a blog post that DeepSeek R1 is now available in the model catalog on Azure AI Foundry and GitHub. However, multiple news outlets also reported that Microsoft and Microsoft-backed OpenAI were investigating whether DeepSeek improperly accessed OpenAI data.

Nadella reiterated the vendor’s close partnership with OpenAI, saying ”their success is our success,” and said that Microsoft itself has done work to optimize inference.

Microsoft Q2 In Detail

Microsoft reported revenue during the quarter of $69.6 billion, a 12 percent increase year over year. It brought in $31.7 billion in operating income, up 16 percent year over year ignoring foreign exchange.

Commercial bookings grew 75 percent ignoring foreign exchange, “significantly ahead of expectations, driven by Azure commitments from OpenAI,” Hood said.

Commercial remaining performance obligation increased to $298 billion, up 36 percent year over year ignoring foreign exchange. Microsoft expects to recognize about 40 percent of that as revenue in the next 12 months. Cash flow from operations was $22.3 billion, up 18 percent year over year. Capital expenditures were $22.6 billion, meeting company expectations, Hood said.

The vendor brought in $24.1 billion in net income, up 10 percent year over year. Microsoft Cloud revenue was $40.9 billion, up 21 percent year over year.

In Microsoft’s productivity and business processes segment, the vendor saw $29.4 billion in revenue, up 13 percent year over year ignoring foreign exchange.

Within this segment, Microsoft 365 Commercial products and cloud services revenue saw 15 percent growth year over year. Dynamics products and cloud services revenue grew 14 percent ignoring foreign exchange.

Microsoft’s “more personal computing” segment saw $14.7 billion in revenue during the quarter, about flat year over year. Windows original equipment manufacturing and devices revenue grew 4 percent year over year.

Hood noted that the OEM results were “ahead of expectations” with drivers including “commercial inventory builds in advance of Windows 10 end of support as well as uncertainty around tariffs,” appearing to reference the economic policy of newly sworn in U.S. President Donald Trump.

Microsoft’s stock traded at about $422 a share after hours Wednesday, down about 5 percent.

Microsoft Q3 Forecast

Next fiscal quarter, Microsoft expects the productivity and business processes segment to see revenue growth between 11 percent and 12 percent, or $29.4 billion to $29.7 billion, according to the vendor.

Microsoft 365 Commercial cloud revenue growth should be between 14 percent and 15 percent. M365 Commercial products should be relatively unchanged year over year. Dynamics 365 should see growth in the midteens.

The “intelligent cloud” segment should see revenue growth between 19 percent and 20 percent, or $25.9 billion to $26.2 billion. Azure should grow between 31 percent and 32 percent. The on-premises server business should decline in the mid single digits. Enterprise and partner services revenue growth should be low to mid single digits.

The “more personal computing” segment should see revenue between $12.4 billion and $12.8 billion. Microsoft expects Windows OEM and devices revenue to decline in the low to mid single digits. Windows OEM revenue should be relatively flat year over year, but Hood warned that “actual results may differ based on current tariff uncertainties.”

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