Microsoft Earnings Analysis: FY2025 (Premium)

Yesterday, Microsoft reported its latest quarterly and fiscal year earnings. But then the software giant delivered a series of surprises in its post-earnings conference call. And so this quarter’s earnings analysis is going in a different direction too.

First, the numbers.

Fourth quarter, fiscal year 2025. In the quarter ending June 30, 2025, Microsoft earned a net income of $27.2 billion on revenues of $76.4 billion. Those figures represent gains of 24 percent and 18 percent, respectively, year-over-year (YOY).

Full fiscal year 2025. In the fiscal year ending June 30, 2025, Microsoft earned a net income of $101.8 billion (up 16 percent YOY) on revenues of $281.7 billion (up 15 percent).

By all accounts, a blockbuster quarter and year, though the recent layoffs are a black mark on the company’s reputation and a strange asterisk to what should be nothing but a blow-out celebration. So maybe we should start there.

? FY25 layoffs

It’s been a tough year for Microsoft employees, with three major rounds of layoffs this calendar year (so far), in January, May, and then early July. We try to forget these things, but layoffs are nothing new at Satya Nadella’s Microsoft: A cursory search shows me that there were at least three rounds of layoffs last year–in January, June, and September 2024–as wells, and Microsoft laid off 10,000 employees all at once in 2023. But the tenor of the layoffs shifted abruptly during the first half of 2025.

The 1900 job cuts that Microsoft made in January were ostensibly performance-based, with employees warned in advance that those not meeting internal targets faced possible termination. However, we later learned that this somewhat understandable rationale for layoffs was undercut by a harsh reality: Many underperforming employees who turned things around after being warned were still laid off because the performance time period that Microsoft evaluated stretched back further and included the year before the warning.

This was debilitating and deflating to those who were let go and for their managers and co-workers, and it was the sign of the fear that would soon sweep through Microsoft’s employee ranks. And then things escalated in May, when Microsoft laid off 6,000 employees in what the company claimed was “building high-performing teams and increasing agility by reducing layers with fewer managers.” But insiders universally told me these were arbitrary and random job cuts, unrelated to performance, and that the emotional toll was deep.

That those cuts came on the eve of Microsoft Build 2025, one of two major in-person events the software giant holds with customers, was unfortunate, timing-wise: As I wrote in Fear and Loathing in Seattle (Premium) and More Fear and Loathing in Seattle (Premium), the employees that Microsoft left behind in the wake of these layoffs were emotionally destroyed by the loss of key team members and friends, and scared by the random and heartless nature of the cuts. I was told multiple times by employees and executives that they all worried about their own careers for the first time, and that these layoffs were “purposefully” random and designed to generate a sense of purpose by scaring everyone.

The layoffs had the opposite effect, of course. Everyone was dejected, terrified, and resigned to a terrible fate, with the only question being when it would happen. Entire Microsoft booths on the Build show floor were left empty, with the employees who would have manned them being let go just a few days before the conference opened. Several speakers, whose presentations would have been memorialized forever with video recordings, were also missing in action. It just felt wrong.

And it was about to happen again. I heard multiple rumors about a third major round of 2025 layoffs, and that these would cut deep into Microsoft Gaming, the business comprised of Xbox, Activision Blizzard, and Microsoft’s other game publishers and studios. Then, at the last minute, there was a reprieve: In a moment of self-awareness, Microsoft’s leadership decided to avoid the embarrassments of Build and push the next layoffs ahead to July and the start of the new fiscal year. That way, it could announce its first Xbox portable gaming devices without layoffs overshadowing Microsoft Gaming’s weakest and most tenuous business, killing whatever little excitement it would otherwise generate.

But the layoffs came, of course they did, and just one day into the new fiscal year: This round involved 9,000 more layoffs, bringing the calendar year 2025 total to over 17,000 employees.

The brutal nature of this year’s layoffs was initially met mostly with silence by Microsoft’s CEO, senior leadership team, and board of directors, with the company glossing over the job cuts during each post-earnings conference call during this period and saying little otherwise. But with the fear mounting and threatening to undercut the performance gains Microsoft wanted, CEO Satya Nadella finally addressed what was happening. And he did so via a long internal email that in no way addressed what was happening.

Nadella wrote that he wanted to explain “what’s been weighing heavily on” him, what he knew employees were obsessing over, the recent job cuts. These decisions were difficult he wrote, though they seemed to have little to do with human decision making, and he thanked those who were gone and would never receive his email for their efforts. He mentioned the uncertainty the cuts had triggered but did not apologize or explain a fix. He noted the “incongruence” of these cuts coming at a time in which Microsoft was spending record sums on “CapEx”–capital expenditures, meaning expenses tied to building out the company’s AI infrastructure–and was richer, more profitable, and more powerful than at any time in its history. But he also never explained why. Not clearly. And not literally.

The strangest passage in this meaning-free missive, perhaps, is his reference to “the enigma of success in an industry that has no franchise value.” This is a “what have you done for me lately” defense in which Nadella seems to be arguing that Microsoft’s past successes–with Windows, Azure, Microsoft 365, or whatever else–did not translate into its successes today. Which is ludicrous, since it is these businesses, and not the AI that Microsoft is frenetically spending money on, that generated the majority of its profits and revenues in the fiscal year that just ended. Nadella’s eyes are on the future, and he is making a high-stake bet on AI, like a gambler pawning their wedding ring so that they can keep playing.

And that’s problematic, no matter how successful Microsoft is.

This is a company that earned a profit of over $100 billion in a fiscal year in which it laid off over 17,000 employees, most of them without a rational, stated cause.

This is a company that spent almost $85 billion building out datacenter infrastructure for AI that may or may not ever be a profitable business, reducing $100 billion in profits to just $15 billion.

And this is a company that can’t bear to tell its former employees the truth. They were laid off because of AI, a message Microsoft cannot communicate explicitly to its customers because doing so would almost certainly trigger a massive scaling back of spending on the software giant’s products and services.

? Key takeaways from Microsoft’s post-earnings conference call

With that level set in mind, let’s take a more in-depth look at Microsoft’s earnings, sticking largely to the surprise revelations.

? No explicit mention of job cuts, layoffs, or employees

Microsoft CEO Satya Nadella and CFO Amy Hood never mentioned the terms “job cuts” or “layoffs,” at all during the post-earnings conference call, and they only mentioned Microsoft employees in passing at the end of Q&A. And almost none of the analysts who asked questions during the Q&A wanted to know anything about those topics either.

Reading into this a bit, it’s clear to me that the Nadella email last week, despite being nothing but filler and meaningless content, was designed to put a stop that conversation, as were some of the curiously unique data points that Nadella and Hood revealed for the first and only time ever during this call. Microsoft, the least transparent company in the tech industry, provided some very specific numbers last night. This was done to distract, and it worked.

The first mention of this hard data occurred just seconds after Nadella started speaking.

☁️ Microsoft Azure

For the first time ever in history, Microsoft provided a specific revenue number, in dollars, for Microsoft Azure, a product that was announced over 15 years ago as Windows Azure, and the primary driver of the software company’s growth during its cloud computing era. And that number is $75 billion in revenues over fiscal year 2025.

Previously to this, Microsoft only described Azure success in terms of year-over-year (YOY) growth percentages, which became problematic when year of 70 percent-ish growth every quarter finally started falling as the business inevitably matured. It may or may not be coincidental that Microsoft kicked off the current AI era specifically when Azure growth fell into the low 30s, but it is fair to say that the strategy worked with Wall Street: Microsoft’s rocket sled of stock price and market cap growth has only continued over the past two-plus years despite the rampant and reckless spending. Indeed, Microsoft’s market capitalization now stands at over $4 trillion, making it only the second company in history, after Nvidia, to reach that lofty financial milestone.

Does $75 billion in revenues justify a $4 trillion market cap? I’m not a financial expert, but I will simply point out that Microsoft has never described this business as profitable. And that the $85 billion it spent on building out its AI infrastructure was, in other words, it spending $85 billion on Azure, literally. So no, it’s not profitable. I assume Microsoft would describe this spending as an investment. If Microsoft were in any way transparent.

Microsoft also noted that Azure’s revenue growth rate was 34 percent in fiscal year 2025. And that means that Azure earned about $56 billion in revenues in FY 2024. Perhaps someone will go back and rifle through previous Microsoft earnings reports, do some math, and see when that goes down to zero. It won’t be me, though. Here, I will simply say that this is the sort of insight that shareholders need and should have been demanding.

Nadella also provided a little specificity to all that cap-ex spending (which is discussed more below): He said that Microsoft opened an unspecified number of new data centers across six continents, presumably in FY25, and that Microsoft now has over 400 data centers in over 70 regions worldwide, “more than any other cloud provider.” While none are literally multi-gigawatt datacenters, a strange metric the industry seems to be building towards, Microsoft “stood up two gigawatts of new capacity” in the fiscal year across an unspecified number of data centers. Microsoft is scaling its data center capacity faster than any of its competitors, which I will accept as a fact. And all its Azure regions are now “AI first,” a term I feel is meaningless and aimed at placating shareholders and those in Wall Street still worried about all the spending.

? Microsoft Copilot (OK, Microsoft 365 Copilot)

After spewing a lot of technical jargon and other nonsense about AI that no one on the call understood–hand-waving to distract is an under-appreciated skill–Nadella dropped another hard number bomb. He said that Microsoft’s “family of Copilot apps” has surpassed over 100 million monthly active users across commercial and consumer.

He did not explain that further by breaking out the commercial and consumer usage numbers. But given Microsoft’s strength with businesses and the utter ambivalence of its consumer customers, one can safely assume that most of that usage comes from the commercial side of the house, meaning Microsoft 365 Copilot. And that is actually good news, on two levels. First, this neatly counters a growing series of reports that suggest that Copilot is, at best, an also-ran when compared to truly popular AI solutions like OpenAI ChatGPT and Google Gemini. And Microsoft 365 Copilot is a paid offering, with per user per month fees, and so Microsoft is making revenues on that usage and paying off at least a tiny slice of its AI spending.

Nadella referred to Microsoft 365 Copilot as being essentially a new Microsoft 365 tier, which is interesting and matches the way I think of it, when he said that “customers continue to adopt Copilot at a faster rate than any other new Microsoft 365 suite.” And he confirmed my belief that this is really about Microsoft 365 Copilot when he added that Microsoft “saw the largest quarter of seat adds since launch with a record number of customers returning to buy more seats.” That’s Microsoft jargon for “commercial customers paying for something with a per user per month subscription fee,” i.e. Microsoft 365 Copilot.

Here’s more proof. Later in the call, Nadella referenced Copilot usage with consumers. There’s no mention of anyone paying for that.

“Our Copilot consumer app also continues to see strong growth in engagement and successful sessions,” he said. “And we are bringing Copilot to every Windows 11 PC.” Hey, it worked for Groove!

?‍? GitHub Copilot

GitHub Copilot is Microsoft’s original Copilot, and it’s also one of the earliest and most successful AI peer programmer offerings, with deep integration in Visual Studio Code, which is cross-platform, and Visual Studio (which is Windows only). GitHub Copilot now has over 20 million users, though I will point out that most of those are free users, since Microsoft added a free tier last December.

That said, growth is growth, and usage growth is still good. And the growth is strong, given that Microsoft reported that it had over 15 million GitHub Copilot users in April, and at that time, it had said that its growth was 4x (so 400 percent, I guess) YOY. Not bad: GitHub Copilot became generally available just three years ago.

I will also point that out that Microsoft took the odd step of naming GitHub Copilot’s competitors, some of which are more successful than Microsoft’s entry in this market. This is particularly odd since the quote was tied to a number so soft it’s not even a number.

“The surge in vibe coding projects and AI coding agents, whether it is Claude Code, Codex, Cursor, or GitHub Copilot, are generating more pull requests and more repos on GitHub,” Nadella said.

It could be worse. Nadella also said that “In healthcare, we had a breakout year for Dragon Copilot.” This product was released during the fiscal year, so it’s not clear what he’s comparing the year to. Indeed, the first mention of Dragon Copilot is from March, just four months ago.

Actually, while I’m on soft numbers, which is more of what we’ve come to expect from Microsoft, here’s another terrific example.

“Dynamics 365 took share this year.”

Sure. Sure it did.

? Xbox and gaming

Here’s another incredible hard number call-out, and the last to grace this call. It’s particularly incredible given the multiple waves of bad news that have enveloped Xbox and Microsoft Gaming since the software giant successfully beat back antitrust regulators around the world and acquired Activision Blizzard.

When it comes to gaming, Microsoft has 500 million monthly active users across platforms and devices.

This is astonishing to me, but I guess it shouldn’t be. Thanks mostly to Activision Blizzard, Microsoft is now arguably the largest videogame publisher on earth. Or maybe not. Microsoft only claimed that it was the top publisher on both Xbox and PlayStation.”

Whatever the success level, it’s not just Activision Blizzard. That company used to report its monthly active user number with each financial earnings statement. And the last of those Activision Blizzard reports, from the quarter ending in July 2023, claimed that the company had about 356 million month active users. And so the combination of Activision Blizzard and Microsoft Gaming today has about 150 million more MAUs, two years later.

A few other numbers tied to gaming.

Call of Duty now has 50 million players on the latest title, and they’ve played that game collectively for over 2 billion hours.

Minecraft, a legacy title that is getting new updates all the time, “saw record monthly active usage and revenue this quarter, thanks in large part to the success of the Minecraft movie.”

Microsoft now has “nearly 40 game in development,” which may help counter complaints that is appears to be scaling back as it lays off game developers, closes studios, and cancels some high profile game projects.

And even Microsoft’s most controversial offerings seem to be doing OK. Microsoft surpassed over 500 million hours of game play streamed via the cloud this [fiscal] year. And Game Pass annual revenue was nearly $5 billion for the first time. Granted, we didn’t get a new Game Pass subscriber figure, a vital hard number that would prove or dispel my theory that Game Pass may have peaked.

? AI spending

Microsoft saved its biggest news for the end of the call.

After summarizing the financial results of the previous quarter and fiscal year, Amy Hood noted that “commercial remaining performance obligation”–what its business customers have committed to spending on Microsoft products and services–increased to $368 billion, up 37 percent YOY, with 35 percent of it to be recognized as revenue in the new fiscal year. She noted that Microsoft Cloud, which is not a business, had revenues of $46.7 billion. She said that Microsoft’s margins overall were 69 percent, down 1 percentage point YOY, and that operating expenses were up (only) 6 percent. And that headcount at the end of June was roughly unchanged year-over-year. Take that, layoff critics!

But then she got to capital expenditures, which in recent years are almost 100 percent about building out Microsoft’s AI infrastructure. She said that Microsoft cap-ex spending in the quarter was $24.2 billion, but declined to reveal that total cap-ex spending in FY25 was about $85 billion, higher than the $80 billion in previously announced; I did the math for my earnings article. Free cash flow was $25.6 billion in the quarter, almost exactly the amount it spent on AI.

“More than half of our spend was on long-lived assets that will support monetization over the next 15 years and beyond,” Hood said, providing a bit more detail about where all the money is going. “The remaining spend was primarily for servers, both CPUs and GPUs, and driven by strong demand signals.”

This is no surprise, but Microsoft expects to deliver double-digit revenue and operating income growth in the current quarter. And it will “continue to invest against the expansive opportunity ahead across both capital expenditures and operating expenses given our leadership position in commercial cloud, strong demand signals for our cloud and AI offerings, and significant contracted backlog.” That is perhaps a bit less straightforward, but Hood then added that Microsoft’s cap-ex spending growth will accelerate in the current quarter. And the hammer fell.

Microsoft’s capital expenditures in the current quarter will be over $30 billion, far higher than the $24.2 billion in spent in the previous quarter and by far the most it has ever spent on cap-ex.

And that was that. She moved on to other predictions about the relative performance of Microsoft various business units as if spending $30 billion in one quarter was in any way not unprecedented the biggest news she had ever uttered out loud. Microsoft, she said, was “excited for FY26.”

? It worked … almost

Microsoft’s strategy to distract the analysts on the call, whether they’re real or my imagined fever dream, mostly worked. The first several analyst questions were all congratulatory softballs, and almost embarrassingly fawning. Nadella and Hood were asked about AI labs, meaning competitors like OpenAI, how companies could monetize AI for SaaS (software as a service), more color on the success of Microsoft Azure, how pleasantly surprising the “magnitude of the upside” in the quarter was, and whether Copilot adoption in businesses would lead to more upselling of additional products and services.

And then someone with an ounce of credibility and/or self respect finally asked whether or when Microsoft would “accelerate Azure” [growth] while “slowing down cap-ex” [spending].

“But how should we think about the shape of the curve of cap-ex vis a vis Azure growth rate in the years ahead?” on analyst asked. “Are we at a point where we’re going to have to continue to do this [level of spending, presumably], and we magically wait for inference and applications to kick in and therefore, create a richer gross margin mix [actually make money on AI, presumably]?”

Hood immediately reminded this person about the $368 billion of contracted backlog I noted above, which she said was “not just Azure, but across the breadth of the Microsoft Cloud” (which, again, is not a business, but includes products in other parts of the company, like Microsoft 365).

“I feel very good that the spend that we’re making is correlated to basically contracted on the books business that we need to deliver, and we need the teams to execute at their very best to get the capacity in place as quickly and effectively as they can,” she said. “The growth rate will decline year over year, but at its core, our investments, particularly in short-lived assets like servers, GPUs, CPUs, network and storage, is just really correlated to the backlog we see and the curve of demand.”

Then she made an interesting admission. She said that she thought Microsoft would be “in better supply/demand shape” June, and that she has pushed back that timeframe now to December. But she also “doesn’t want people to get overly focused on a pivot point,” because Microsoft is not being conservative about this investment.

That might have opened the floodgates, but Microsoft only allowed one more question.

That analyst asked about whether Microsoft was seeing “any productivity gains from leveraging AI internally,” which Hood dodged. She said that “the area to focus on is margin,” which didn’t seem like an answer to that question, and that she also wanted to focus on delivering innovative and competitive products “because that drives revenue.”

In short, she talked about the business, not Microsoft’s use of AI internally. Oddly, Nadella never stepped in to provide his take on this topic. Instead, the call just ended.

Interesting.