Recently, in the Top 15 AI Stocks analysis it was stated “If Nvidia holds the crown in the AI hardware arena, then Microsoft holds the crown in the AI enterprise arena.” Tonight, Microsoft proved why the AI Enterprise crown is rightfully theirs.
Management came out swinging this evening on multiple fronts. First off, the acceleration in Azure and Other Services to 39% up from 35% last quarter was significantly higher than expected, with the Street calling for growth of 33.7%. To grow nearly 40% at this scale is impressive.
Microsoft also revealed its Azure revenue number for the first time of $75 billion for FY2025 (although not entirely surprising as we were modeling for Azure to be hitting $80 billion very soon). From there, the CFO guided for 37% growth in Azure for next quarter – indicating continuing a high growth rate at scale will not be a problem in the near-term (note, H2 is expected to see lower growth than H1).
However, if we look at Commercial RPO, it’s clear something big is going on. Last quarter, we pointed out that Commercial RPO was the one key metric we were watching, stating: “Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.” At the time, RPO was at $315 billion, up 34% and 33% on a constant currency (CC) basis.
This quarter, Commercial RPO has accelerated to $368 billion, up 37% and 35% on CC basis. Microsoft’s Commercial RPO was in the mid-$100 range in 2022-2023 period to help illustrate how quickly contracted revenue has grown. Wow. We do not typically see such large growth rates on such a large RPO base. It’s almost inconceivable.
A few years back, I described in detail why AI is first and foremost an enterprise technology, specifically calling out Microsoft’s path to $100 billion in AI revenue by 2027. We are seeing this materialize now. Microsoft is putting formidable distance between itself and best-of-breed cloud players. To illustrate, stocks like Confluent are down 27% after hours following the loss of a large customer.
In addition to the key metrics stated above, management carries a sense of confidence when analysts question the ROI on capex. And when Mark Zuckerburg boasted about building a gigawatt-plus cluster called Prometheus next year, Satya made sure to lead his introduction by saying “We stood up more than 2 gigawatts of new capacity over the past 12 months alone.” You’ll find more commentary on this below.
Revenue – Azure reported as standalone segment for first time
Revenue was up $76.4 billion for growth of 18% or 17% in constant currency. This is up from last quarter with growth of 13% or 15% in constant currency and beat consensus of $73.83 billion. For the fiscal year ending in June, the company reported revenue of $281.7 billion, up 15%.
Azure revenue was reported as a standalone metric for the first time, being stripped out of “Azure and Other Services.” The company stated Azure saw $75 billion in revenue or growth of 34%. For comp purposes, the original segment grew 39% up from 33% / 35% on CC basis last quarter.
Below, you can see the visible acceleration in overall revenue
Below you can see that 39% is the highest growth rate we’ve seen in some time for Azure and Other Services:
Looking forward, management guided for revenue of $75.25B at the midpoint, beating consensus of $74.15B. This would represent growth of 14.7%.
According to the CEO, Microsoft is ahead of other hyperscalers in speed of data center buildouts: “We continue to lead the AI infrastructure wave and took share every quarter this year. We opened new DCs across 6 continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers. We stood up more than 2 gigawatts of new capacity over the past 12 months alone. And we continue to scale our own data center capacity faster than any other competitor.”
Revenue segments – Cloud has highest growth rates since 2022
Cloud reported some of its highest growth in three years. The CEO stated: “Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago” as well as “
- Microsoft Cloud was up 27% and up 25% on CC basis for revenue of $46.7B. This marks the highest quarterly growth rate since CY2022
- Gross margin was 70% up 100 basis points from 69% last quarter
- Productivity and other Businesses was $33.1 billion, up 16% and 14% on CC basis.
- Intelligent Cloud was up 26% and up 25% on CC basis for revenue of $29.9 billion. This was the highest growth rate since CY2022
- More Personal Computing was up $13.5B for growth of 9%
Commercial Bookings Surpasses $100 Billion for the first time
To help support the case for future growth, both commercial bookings and commercial RPO came in surprisingly strong.
The CFO stated that for the first time commercial bookings surpassed the $100 billion mark, increasing 30% on CC basis. Commercial RPO increased to $368 billion, up 35% on CC basis with 35% recognized in revenue in the next 12 months.
Additional key metrics: 500 trillion tokens processed last year; 800M AI Product Users
Azure is always the main metric looked at, yet we should pause and share a few more important key metrics in this banner report.
- Copilot apps have surpassed 100 million monthly active users across commercial and consumer.
- Across broader AI features, there are over 800 million monthly active users.
- Foundry Agent Service is now being used by 14,000 customers to build agents.
- 80% of Fortune 500 use Foundry, processing 500 trillion tokens, up 7X YoY.
- Microsoft Fabric is a data and analytics platform for AI workloads, with revenue up 55% year-over-year and over 25,000 customers. According to management: “It's the fastest-growing database product in our history.”
- There are 20 million GitHub Copilot users. GitHub Copilot enterprise customers increased 75% quarter-over-quarter and 90% of the Fortune 100 use GitHub Copilot.
Margins & Earnings
EPS of $3.65 beat consensus estimates of $3.38.
- Gross margin was 68.5% up from 68.1% last quarter for gross profit of $52.4B.
- Operating margin of 44.9% was up from 44% for operating profits of $34.3B.
- Net margin was 35.6% up from 34.9% last quarter for net profits of $27.2B.
Cash flows & capex raised to eye-watering $30B per quarter
- Operating cash flow of $42.6B was up 15% YoY
- Free cash flow of $25.6B was up 10% YoY
- Capex of $24.2 billion was up 27% YoY with management guiding for capex of $30 billion next quarter.
Earnings Call Q&A:
Capex Spend Correlates to $368B in RPO:
Every Big Tech company will be asked about ROI on capex spending, and the CFO handled the question quite well, stating: “when you think about the full year comments I've made on CapEx as well as the Q1 guidance of over $30 billion, you first have to ground yourself in the fact that we have $368 billion of contracted backlog we need to deliver, not just across Azure but across the breadth of the Microsoft Cloud.
So in terms of feeling good about the ROI and the growth rates and the correlation, 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.
And so when you look, and we've talked about the growth rate [of capex] will decline year-over-year, but at its core, our investments, particularly in short-lived assets like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And I talked about, my gosh, in January and said I thought we'd be in better supply demand shape by June. And now I'm saying I hope I'm in better shape by December.”
Conclusion:
This was an earnings report for the ages – simply because the Commercial RPO is massive, and Microsoft is proving they can grow at a scale we haven't seen yet in AI software. Earlier today, I had stated on Bloomberg that Microsoft could see $40 billion in AI revenuesometime in 2026 – which is a massive number, but what's most important is the rapid ascent in reaching that number.
If you zoom-out, a few years back I've made the case that Microsoft could see as much as $100 billion in AI revenue by 2027 and then I upped it to $200 billion by 2028. Should we see this ballpark figure, it would mark a rapid ascent hard to fathom a few years back. This earnings report is a step in the right direction to meet that mark.
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