Executive Summary
Microsoft delivered a record QQ3 2025 quarter, powered by strength in the Microsoft Cloud and AI-enabled workloads. Revenue totaled $70.1 billion, up 13% year over year (YoY) and 15% in constant currency (CC), with cloud revenue of $42.4 billion rising 20% YoY and 22% CC. Cloud gross margin remained robust at 69%, though a year‑over‑year decline of ~3 percentage points reflected the scaling of AI infrastructure. Operating margin expanded to 46% as cost discipline and portfolio mix offset ongoing AI investments. Net income reached $25.8 billion, and GAAP diluted EPS was $3.46, up mid‑teens on CC basis. Free cash flow reached $20.3 billion, supporting a $9.7 billion dividend and share repurchase program and leaving a strong liquidity position for continued AI/cloud investments.
Management emphasized Azure demand, data fabric / analytics integration, and a broad AI app stack (Copilot, Foundry, GitHub Copilot, Dynamics 365) as the core growth catalysts. Management cautioned about AI capacity constraints beyond June and highlighted supply chain / data center optimization as key levers to meet demand while improving efficiency. The company reaffirmed a constructive FY25–FY26 outlook, including Azure growth in the mid‑30s CC range and continued strength in annuity bookings, backed by a $315 billion commercial backlog with ~40% expected to be recognized in revenue in the next 12 months.
Overall, Microsoft remains well positioned to monetize AI and cloud scale through diverse business lines (Productivity and Business Processes, Intelligent Cloud, and More Personal Computing) while maintaining solid profitability and strong cash generation. The key questions for investors relate to the pace of AI-capital efficiency, data center capacity timing, FX sensitivity, and how well the current AI ramp translates into sustainable margin expansion over the next 12–24 months.
Key Performance Indicators
Key Insights
Revenue: $70.10B in QQ3 2025, +13.0% YoY; +0.62% QoQ. Gross profit: $48.15B, +11.1% YoY; +0.66% QoQ. Operating income: $32.00B, +16.0% YoY; +1.10% QoQ. Net income: $25.82B, +17.7% YoY; +7.1% QoQ. EPS (diluted): $3.46, +17.6% YoY; +7.1% QoQ. YoY/CC metrics reflect cloud/AI scale as main delta drivers.
Microsoft Cloud revenue: $42.4B, +20% YoY; +22% CC. Cloud gross margin: 69%, down ~3pp YoY due to AI infra scaling. Company gross margin: 69%, down ~1pp YoY. Operating expenses: +2% YoY, +3% CC, dr...
Financial Highlights
Revenue: $70.10B in QQ3 2025, +13.0% YoY; +0.62% QoQ. Gross profit: $48.15B, +11.1% YoY; +0.66% QoQ. Operating income: $32.00B, +16.0% YoY; +1.10% QoQ. Net income: $25.82B, +17.7% YoY; +7.1% QoQ. EPS (diluted): $3.46, +17.6% YoY; +7.1% QoQ. YoY/CC metrics reflect cloud/AI scale as main delta drivers.
Microsoft Cloud revenue: $42.4B, +20% YoY; +22% CC. Cloud gross margin: 69%, down ~3pp YoY due to AI infra scaling. Company gross margin: 69%, down ~1pp YoY. Operating expenses: +2% YoY, +3% CC, driven by disciplined cost control and selective investments into AI capacity. Annuity mix: 98% of revenue; Commercial remaining performance obligation (RPO): $315B, up 34% YoY, with ~40% recognized in next 12 months. Backlog quality supports visibility for FY25–FY26.
Cash flows: Operating cash flow $37.0B, FCF $20.3B. Capex (including finance leases): $21.4B; PP&E cash outlay $16.7B. Backlog and synthetic revenue signals underpin durable cash generation going into Q4 and beyond.
Balance sheet: Total assets $562.6B; Total liabilities $240.7B; Total stockholders’ equity $321.9B. Cash and cash equivalents plus short-term investments $79.6B; Total debt $60.6B; Net debt position near zero to modest net cash depending on FX and rounding. Dividend/yield: $9.7B returned to shareholders; dividend yield ~0.22%.
Segment highlights: Productivity and Business Processes (PBP) $29.9B; Intelligent Cloud $26.8B; More Personal Computing $13.4B. Azure grew strongly with non‑AI services contributing meaningfully; AI services growth was contained by supply/demand balance and capacity ramp timing.
Income Statement
| Metric |
Value |
YoY Change |
QoQ Change |
| Revenue |
70.07B |
13.27% |
0.62% |
| Gross Profit |
48.15B |
11.06% |
0.66% |
| Operating Income |
32.00B |
16.02% |
1.10% |
| Net Income |
25.82B |
17.71% |
7.12% |
| EPS |
3.47 |
17.63% |
7.10% |
Key Financial Ratios
operatingProfitMargin
45.7%
operatingCashFlowPerShare
$4.98
freeCashFlowPerShare
$2.73
dividendPayoutRatio
23.9%
Management Commentary
Key takeaways from the earnings call:
- Strategy and execution: Satya Nadella emphasized record results driven by Azure Cloud strength and a systematic push across AI platforms, data analytics, and developer tools. Quote: It was a record quarter, driven by continued strength of Microsoft Cloud, which surpassed $42 billion in revenue, up 22% in constant currency.
- AI infrastructure and efficiency: Management highlighted rapid AI model scale and efficiency gains, noting that capacity and cost per token have improved meaningfully and that AI workloads are increasingly integrated with Fabric, Foundry, and other AI products.
- Azure demand and backlog: Amy Hood noted Azure revenue in Q3 at $42.4B and that the majority of margin pressure came from AI infrastructure scaling, with non‑AI services driving most of Azure upside in the quarter. Azure growth guidance for Q4 is 34–35% CC.
- Capital intensity and timing: Commentary around long lead times for data center builds (5–7 years from land to build) and the need to balance capacity with demand, including some near-term scarcity of data center power. Amy Hood stated the goal of being in balance by end of Q4, with some tightness exiting the year.
- Outlook and risk: Management signaled AI capacity constraints beyond June and reiterated a disciplined approach to capex and capital efficiency as AI workloads scale.
It was a record quarter, driven by continued strength of Microsoft Cloud, which surpassed $42 billion in revenue, up 22% in constant currency.
— Satya Nadella
This quarter, revenue was $70.1 billion, up 13% and 15% in constant currency. Gross margin dollars increased 11% and 13% in constant currency while operating income increased 16% and 19% in constant currency. And earnings per share was $3.46, an increase of 18% and 19% in constant currency.
— Amy Hood
Forward Guidance
Outlook commentary from the QQ3 2025 call reinforces a constructive trajectory for FY25–FY26, with the following notable items:
- Revenue guidance by segment for Q4: Productivity and Business Processes (PBP) $32.05–$32.35B (+11% to +12% CC); Intelligent Cloud $28.75–$29.05B (+20% to +22% CC); More Personal Computing $12.35–$12.85B. Windows OEM and Devices expected to decline mid/single digits; Search and Edge advertising ex‑TAC up in the high-teens; Gaming mid‑single digits.
- Azure growth: Q4 Azure growth expected to be 34–35% CC, reflecting ongoing demand for cloud services even as AI capacity scales.
- Margin and costs: Microsoft Cloud gross margin ~67% for Q4; Company gross margin around 69%, with COGS and Opex growth profiles guided to be manageable. Overall full-year FY25 operating margins expected to be up slightly YoY, despite AI investments.
- Capex: Capex to grow in Q4, with H2 capex unchanged from prior guidance; recognize longer asset life vs. shorter-lived components to sustain monetization over time.
- Key monitorables for investors: AI capacity constraints and data-center efficiency, FX impact (FX expected to add roughly 1 point to revenue growth in total and modestly to COGS/OpEx), and progress in annuity bookings/backlog realization. The core thesis remains intact: AI-enabled cloud growth coupled with steady annuity streams should sustain durable profitability and strong cash generation.