Microsoft Earnings Analysis: FY25 Q1 (Premium)

This admittedly unusual look at Microsoft's earnings is skewed by my focus on the consumer side of the software giant, so I'm mostly ignoring the business segments that are driving its growth. That's fine, but I do have to peek under the AI kimono to see what's happening there, of course.

Microsoft's fiscal 2025 begins with an accounting change, of all things: Back in August, the software giant explained that it was shuffling several business segments into different parts of the company. It claimed it was doing so to be more transparent to investors--a good thing--but as I noted, this was more likely yet another example of Microsoft being less transparent--a bad thing--by hiding poorly performing businesses within ever more inscrutable groups of businesses with no hard numbers and no real understanding of how the sausage is made.

This worry was realized with its most recent earnings announcement, in which Microsoft earned a net income of $24.7 billion on revenues of $65.6 billion, with double-digit growth in both figures. It's getting harder and harder to know where the money is coming from.

At a high level, Microsoft has three business segments. And thanks to that shuffling, there's a new winner from a revenue perspective. They are:

Productivity and Business Processes (Microsoft 365): $28.3 billion in revenues, up 12 percent YOY.

Intelligent Cloud (Azure): $24.1 billion in revenues, up 20 percent YOY.

More Personal Computing (Windows, Xbox, Surface): $13.2 billion in revenues, up 17 percent YOY.

So that's curious. Compounding the changes, Microsoft is eager to prove to investors that its massive and unsustainable investments in AI are paying off. So let's start there. These days, Microsoft is all about AI.
AI
The obfuscation was immediate in yesterday's post-earnings conference call with investors.

"All-up, our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone," CEO Satya Nadella said at the start of his prepared comments. Mission accomplished: Using this fuzzy metric--revenues are not profits, we have no idea how it calculated this figure or what it included, and it ignores the elephant in the room, which is the cost of those revenues--it looks like Microsoft's AI investors are somehow already paying off. So What am I worried about?

Looking at infrastructure, which these days is mostly AI infrastructure, Nadella glossed over a lot of spending. Datacenters in over 60 regions around the world. And new cloud and AI infrastructure investments in Brazil, Italy, Mexico, and Sweden in just that one quarter. He explained away Microsoft's massive investments in OpenAI by noting how much the company was worth, so that investment is sound (on paper). And then went on to explain, subtly, how Microsoft is reducing its reliance on OpenAI at almost every level. (Microsoft's "losses on investments"...