Microsoft Q3 2025 Earnings Preview: Five Things To Know

‘We are, to no-one's surprise, looking forward to hearing where Azure growth settles out for the period and what’s the AI contribution to growth,’ KeyBanc said in an April report.

The effects of economic uncertainty under global tariffs hitting customer demand for technology projects. The return on all this artificial intelligence spending. And Microsoft’s reputation in the security field.

These are some of the subjects expected to come up Wednesday during the Redmond, Wash.-based cloud, AI and productivity technology giant’s third fiscal quarter earnings report. Microsoft executives will cover the three months ended March 31.

Microsoft Third-Quarter 2025

The sentiment among investment firms going into Microsoft’s earnings has ranged from business as usual to uncertainty as they try to read the tea leaves for whether companies are hesitating to spend on technology while waiting for clarity around global tariffs.

Multiple investment firms have used channel partner surveys to gauge Microsoft customer sentiment in the short term and the long term.

Morgan Stanley took fiscal year 2025 revenue expectations 0.6 percent below Wall Street consensus—now expecting $275.2 billion instead of a previous forecast of $275.9 billion—and fiscal year 2026 revenue 2 percent below consensus, landing at $306.48 billion instead of $312.9 billion.

If Morgan Stanley’s prediction holds, Microsoft would see 12.3 percent growth year over year in fiscal 2025 and 11.5 percent growth in fiscal 2026.

KeyBanc also took down estimates for Microsoft’s quarterly performance in an April report, although the investment firm noted that it feels better about Microsoft after ServiceNow and SAP’s “better-than-expected reports” and Google Cloud meeting expectations.

“We are, to no-one's surprise, looking forward to hearing where Azure growth settles out for the period and what’s the AI contribution to growth,” the firm said. “We will also be eager to hear about any diversification of the supply chain and how management currently has baked in for the impact of the trade war on the business.”

Bank of America backed Microsoft in an April report as a resilient business in a recession due to its subscription business model, enterprise customer base and reputation as a platform vendor already running in enterprises, making it a contender for consolidated wallet share as spending constricts.

Microsoft’s consumption-based business model and small- and midsize-business customer exposure make it a business to bet on as the economy improves as well, according to the firm.

Read on for what to expect from Microsoft’s third fiscal quarter earnings report Wednesday.

Partner Sentiment Surveys

Investment firm surveys of members of Microsoft’s 500,000-plus member partner ecosystem showed some waning optimism in cloud and AI unless Microsoft leadership delivers good news Wednesday.

William Blair’s survey of 71 VARs showed “a healthy spending environment (boosted by pre-tariff buying) that was largely consistent with the prior quarter,” according to an April report by the investment firm.

But looking ahead, “VARs have become more pessimistic,” the firm said. “While it is too soon to tell the magnitude of impact on 2025 IT spending, the fear expressed by our VAR contacts is that macro/tariffs will cause customers to pause non-essential purchasing decisions until they have more macro clarity.”

VARs working with state and local education, manufacturing and retail showed more concern compared with health care, defense, energy and U.S. federal, according to the firm. Customers have been prioritizing “mission-critical products, such as security, backup and recovery, and networking, with more discretionary items put on the back burner.”

Customers might also look to consolidate spending around particular platform vendors, according to the firm. “We continue to see Microsoft’s wallet share within enterprises grow as customers see the benefits of consolidating vendors (across security, cloud services, productivity, endpoint management, DevOps, and collaboration).”

Morgan Stanley said in an April report that partners have seen “a 'wait-and-see' approach on large transformational deals,” with new deals “moving along slower than expected.” The firm also noted “internal execution in the partner organization and Copilot product ramp” as impacts to partners.

On the bright side, “partners did not signal a sharp deceleration in consumption behavior or an uptick in cost optimizations,” according to Morgan Stanley. “Strategic priorities appear largely unchanged with customers focused on Azure AI, data management (in particular, Fabric), and modernizing data governance/security for the growing Copilot adoption.”

KeyBanc’s latest VAR survey showed “a slower demand environment, slower cloud growth” and a lowered reputation for Microsoft’s strategic importance.

“Although it’s typical for us to see a reset of results and reacceleration of spend pushed out, this survey showed expectations for 2025 IT budget growth fell 170 bps q/q to 1.9% from 3.6% just 90 days ago,” according to KeyBanc. “We have continued to see long-term cloud expectations sit below the historical average in the last five surveys and after a rebound in 4Q24 our 1Q25 survey saw another sharp decline to near all-time lows of 48%.”

The firm also showed “a step back in the number of respondents that are expecting faster cloud growth in the next 12 months to 19% from 21%” and the number of respondents who expect slower cloud growth in the next 12 months more than doubled to 19 percent, “the highest level since 1Q23.”

Looking Deeper Into Azure, Cloud

The VARs William Blair surveyed reported “sustained demand for Microsoft 365 licenses, with continued customer consolidation around E3/E5 upgrades and growing adoption of standalone offerings, including SharePoint, Power BI, Dynamics 365, and Intune.”

The firm found that cloud optimization efforts subsided in the quarter “as customers expand both new and existing workloads.”

Microsoft encouraging customers to transition from cloud-only Enterprise Agreements (EAs) to Microsoft Customer Agreement for Enterprise (MCA-E) or the Cloud Solution Provider (CSP) program for purchases “should help drive Azure growth as the new subscriptions are more cloud-centric and flexible,” according to William Blair.

A potential boost to Microsoft’s cloud business is the migration of VMware customers to alternatives such as Microsoft’s Azure Local and Hyper-V, according to an April report by William Blair. Indeed, IBM’s most recent earnings call called out the movement of VMware customers to IBM subsidiary Red Hat as fueling growth.

However, “moving off VMware is operationally complex and may not be much less expensive when factoring in hardware refresh costs,” according to William Blair.

The firm called Nutanix the top pick for leaving VMware, but Microsoft’s Hyper-V has proven enticing to “cost-sensitive customers.”

“It does not require a shift to a hyperconverged infrastructure (HCI), making it a more accessible option for budget-conscious organizations (Hyper-V is also included in some Windows licenses),” according to William Blair.

CRN has also reported on Citrix customers looking to Azure Virtual Desktop (AVD) as a potential replacement for virtualization needs, among other alternatives.

The partners Morgan Stanley surveyed reported impacts to Azure bookings and consumption, “subdued” Microsoft 365 Copilot performance “as adoption remains tepid and further hampered by deal cycle elongating in this macro environment.”

The firm walked away from an expected second-half acceleration in Azure, lowering its Azure growth estimates year over year to 31 percent for the third fiscal quarter and 30 percent for the fourth quarter, down from 31.5 percent and 32 percent, respectively, due to economic uncertainty. The firm did not find material change to Azure AI demand.

The firm also expects “further demand weakness in the Server business and in Enterprise Services,” leading to changes in its predictions for the “intelligent cloud” division that includes those offers and Azure. Morgan Stanley increased intelligent cloud estimates by 0.2 percent in fiscal 2025 and decreased fiscal 2026 estimates by 1.3 percent and fiscal 2027 estimates by 2.8 percent.

CIOs surveyed by Morgan Stanley suggested saturation in Infrastructure as a Service adoption but growth in Platform as a Service, with Microsoft a leader in both categories.

Morgan Stanley found that Microsoft’s channel “downticked for a second quarter on Copilot adoption expectations, sounded stable on the E3/E5 migration momentum, and upticked on the potential of future Copilot Chat and Agent” sales.

E5 upgrades came out ahead of plan with 30 percent of CIOs saying they use this high-tier license in the latest survey, up from 27 percent in the second quarter of 2024.

KeyBanc said that slower cloud growth measured in its surveys is a negative especially if AI demand does not come to full fruition in the near term.

The firm’s own research into the non-AI Azure business was “not positive.” The firm predicts 30.5 percent Azure and other cloud services growth ignoring foreign exchange, a point below Wall Street consensus.

AI Demand

William Blair’s VAR survey showed “worry that AI deployment timelines could push out as customer urgency to act abates,” the firm said in April.

VARs also reported customers still find the $30-per-user, per-month price for Microsoft’s Copilot AI offer high compared with its value proposition. “Adoption is especially cautious in regulated industries like healthcare and financial services, where data governance challenges persist,” according to William Blair.

Main use cases include Teams recaps, email inbox summaries and SharePoint searches, according to the firm. Google adding Gemini AI assistant at no additional cost to its Workspace productivity application suite has put competitive pressure on Microsoft.

William Blair said that Microsoft AI adoption should also help cloud revenue. “As generative AI adoption broadens, Microsoft is well positioned to benefit from increasing cloud demand for training and inference workloads,” according to the firm’s April report.

Partners saw large Copilot deal weakness and pricing pressure from more discounts to increase Copilot adoption, according to the firm.

About 70 percent of CIOs said they expect to use Microsoft 365 Copilot over the next 12 months, Morgan Stanley said. Those CIOs expected to deploy M365 Copilot across 17 percent of their user base—down from a 21 percent expectation in the second quarter. The three-year user base deployment share expectation also fell from a 46 percent expectation in the second-quarter survey down to 38 percent in the most recent survey.

But AI agents and Copilot Chat have proven “an on-ramp for customers to get more employees to use Copilot out of the gate, thereby improving effectiveness as learnings can be shared across the organization,” according to Morgan Stanley.

A survey of CIOs showed the investment firm that “35% of CIOs expect Microsoft to gain the largest incremental share in GenAI spending in 2025” and “30% of CIOs who have not yet started deploying AI projects note expectations to leverage hyper-scale cloud vendors like AWS, Azure, and Google Cloud Platform (GCP).”

Morgan Stanley also sees Microsoft as “widely expected to be leveraged for AI agent strategies, reflecting the strategic advantage of Microsoft 365 Copilot.” The firm saw 32 percent of CIO survey respondents call Microsoft “best positioned” for AI agents.

Wedbush said in an April report that dozens of top CIOs, IT product managers, partners and key enterprise decision-makers have told the investment firm that they are holding to CapEx plans for 2025. About 15 percent of overall IT budget is influenced or focused on AI.

“Companies and CIOs we are speaking with will not just halt or stop major cloud migrations and AI projects as the amount of planning, budget dollars, strategic focus has already left the station,” according to the firm. “Despite a very uncertain backdrop they are moving full steam on these key AI initiatives.”

Lower-level IT projects will likely get pushed into the fall and winter until global tariff activity settles, according to the investment firm. It estimated that 25 percent of large deals in the pipeline are getting pushed or paused. Microsoft could give cloud revenue guidance with caveats as “predicting the next few quarters is essentially playing darts blindfolded,” according to Wedbush.

“We believe AI and cloud driven spending will be a high priority area during this uncertainty and software should outperform other subsectors of tech,” according to Wedbush.

Microsoft’s Growing AI Costs

In an April report, KeyBanc said it is “increasingly skeptical” of Microsoft generating a positive net present value on its $100 billion-plus cumulative spend on AI infrastructure—especially if costs jump from global tariffs.

While there are some tidbits of room to maneuver, Microsoft is on the hook for a large number of leases that have yet to come online and data centers that have not yet been built or filled with kits,” the firm said. “We do worry about the Company's willingness and/or ability to be nimble on its AI investments.”

The firm added that “as the capital expenditures roll into depreciation, Microsoft will be increasingly reliant on AI replacing its human capital in order to keep expense growth at bay.” KeyBanc increased the estimate in cost of goods sold (COGS) on services, even as product costs should go down.

KeyBanc said it expects tariffs to hit not only Microsoft’s AI hardware, but also its Azure servers, laptops and tablets.

“We expect the hardware components of Microsoft's supply chain to see a bigger impact than on other software vendors' costs,” according to KeyBanc, which still expects Microsoft to spent $80 billion on CapEx this fiscal year “even as the company has reportedly walked away from some leases and paused some projects related to data centers.”

The firm said it did not know Microsoft’s “exact percentage of the manufacturing exposure to foreign countries,” but continued data center expansion alone has likely increased its exposure to tariffs on Asian countries. Plus, Microsoft has about 102,000 international employees that could expose Microsoft to fluctuating dollar strength.

The firm fears negative impact to Microsoft if it is unable to pass higher hardware input costs to consumers to risk lower device and service demand.

Intel’s reported bump in sales to get ahead of tariff fears and ability to move around its global supply chain network to minimize tariff impact bodes well for Microsoft, according to KeyBanc.

The CapEx growth for next fiscal year “is hazy,” Melius Research said in its April report. The change in Microsoft’s relationship with OpenAI could be a tacit admission that Microsoft’s infrastructure alone isn’t enough to handle OpenAI’s vast compute resources, according to the firm.

“Something below 20% FY26 Capex growth is quite possible, though spend will be more focused on Nvidia GPUs,” according to the firm. “We would hope Redmond explains what’s really going on here quite carefully since its Capex commentary impacts a whole lot more than just themselves.”

In an April report, Bank of America said Microsoft might be canceling up to 2 gigawatts (GW) of new data center leases out of 6 GW of total capacity. The firm attributed the cancellations to OpenAI getting closer with Oracle and other cloud vendors.

“Overall, we see AI demand is simply shifting between vendors rather than going away,” according to Bank of America.

Wedbush said in an April report that it has not found that Microsoft, Amazon and Google are cutting CapEx and data center spending.

William Blair said that “pauses or delays in data center construction are more likely to impact infrastructure demand in two to three years.”

“For 2025, we continue to believe GenAI remains the top investment priority for hyperscalers—as it is the fastest-growing part of their businesses,” according to the firm.

Morgan Stanley called tariff impacts on AI CapEx cost “a wildcard,” but noted that less spending on AI improves Microsoft’s free cash flow.

In the firm’s view, Microsoft’s leadership has highlighted “an economic model around the already created IP from its OpenAI partnership and driving towards more inference by the end users, rather than building towards the next-biggest training cluster.”

The firm believes that Microsoft will have about “19 million H100 equivalents by FY29, which would constitute a 58-fold increase over FY24, supporting an outsized compute capacity build relative to our bottom-up AI revenue forecast increasing 20-fold over the same time period.”

Morgan Stanley expects Microsoft to spend between $95 billion and $100 billion on CapEx in fiscal year 2026, according to its April report.

Tariffs should negatively hit Microsoft’s Windows and devices business, Morgan Stanley said. However, Microsoft reports that business along with its gaming and advertising revenue, which could make the extent of the hit difficult to parse out. The firm took Microsoft’s “more personal computing” division growth expectations for fiscal 2025 down 180 basis points and expectations for fiscal 2026 down 520 basis points in its April report.

Security Sales Concern?

KeyBanc said in an April report it wants to hear updates to Microsoft’s security business after its latest IT VAR survey “showed the worst Meets/Beats performance” since the first quarter of 2023.

“The number of respondents who would describe their Microsoft practice as a whole below plan more than doubled for 6% in 4Q24 to 20%,” according to the firm—although the vendor still fared better than overall practice expectations meets and beats of 76 percent for the survey.

KeyBanc’s survey appears at odds with one done by William Blair, which found that Microsoft’s “ consolidated suite of security capabilities remains a core driver of up-tiering to E5 license bundles, helping customers generally address the multitude of security requirements for organizations today.”

“From a product perspective, we heard about positive channel feedback for Intune (for endpoint security), Sentinel (for SIEM/SOAR), Defender (XDR), and Purview (data governance and security platform),” according to William Blair’s April report.

Morgan Stanley’s partner survey found that more focus on security and governance fueled E5 migration strength, according to the firm.