Microsoft (MSFT Quick QuoteMSFT - Free Report) reported third-quarter fiscal 2025 earnings of $3.46 per share, which beat the Zacks Consensus Estimate by 8.13% and increased 17.7% on a year-over-year basis. 

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Revenues of $70.06 billion increased 13.3% year over year and beat the Zacks Consensus Estimate by 2.46%. At constant currency (cc), revenues grew 15% year over year, showcasing strong demand for cloud and AI offerings. 

Microsoft stock saw its shares jump 7% in extended trading on accelerating growth in its Azure cloud infrastructure unit. 

Commercial bookings increased 18% (up 17% in cc) and were significantly ahead of expectations, driven by Azure commitments from OpenAI. Execution was strong across core annuity sales motions.

Commercial remaining performance obligation increased 33% (up 34% in cc) to $315 billion. Roughly 40% will be recognized in revenues in the next 12 months, up 17% year over year. The remaining portion, recognized beyond the next 12 months, increased 47%. In the reported quarter, the annuity mix was 98%.

FX was roughly in line with expectations on total company revenues, segment-level revenues, and operating expense growth. FX decreased COGS growth by only 1 point, 1 point unfavorable to expectations.

Microsoft Cloud revenues were $42.4 billion, which was ahead of expectations, and grew 21% (up 22% in cc). Microsoft Cloud’s gross margin percentage was 69%, which was in line with expectations, and decreased 3 points year over year, owing to the impact of scaling the AI infrastructure.

Segmental Details

The Productivity & Business Processes segment, which includes the Office and Dynamics CRM businesses, contributed 42.7% to total revenues. Revenues increased 10.4% (up 13% at cc) on a year-over-year basis to $29.9 billion, which came ahead of expectations, driven by LinkedIn, Microsoft 365 commercial products, and Microsoft 365 consumer.

M365 commercial cloud revenues increased 12% (up 15% in cc), in line with expectations. ARPU growth was again driven by E5 and M365 Copilot. With M365 Copilot, MSFT continues to see growth in adoption, expansion and usage. ARPU growth was again driven by E5 and M365 Copilot. Paid M365 commercial seats grew 7% year over year to 430 million, with installed base expansion across all customer segments, though primarily in small and medium business and frontline worker offerings.

M365 commercial products revenues increased 5% (up 8% in cc), significantly ahead of expectations, driven by higher-than-expected Office transactional purchasing. 

M365 consumer cloud revenues rose 10% (up 12% in cc), ahead of expectations, driven by higher-than-expected subscription growth following the price increase in January. Microsoft consumer subscriptions grew 9% to 87.7 million.

LinkedIn revenues increased 7% (up 8% in cc), ahead of expectations, due to better-than-expected performance across all businesses. The Talent Solutions business continues to be impacted by weakness in the hiring market.

In subscriptions, LinkedIn Premium saw more than 75% quarter-over-quarter subscriber growth in the Premium Pages offering for SMBs. LinkedIn Marketing Solutions remains the leader in B2B advertising, with two consecutive quarters of accelerated revenue growth.

Dynamics 365 revenues jumped 16% (up 18% in cc), in line with expectations with continued growth across all workloads.

Segment gross margin dollars increased 10% (up 13% in cc), and gross margin percentage was relatively unchanged year over year despite scaling the company’s AI infrastructure. Operating expenses rose 1% (up 2% in cc) and operating income grew 15% (up 18% in cc).

The Intelligent Cloud segment, including server and enterprise products and services, contributed 38.2% to total revenues. The segment reported revenues of $26.75 billion and grew 20.8% (up 22% in cc), ahead of expectations, driven by Azure.

Server products and cloud services revenues climbed 22% (up 24% in cc). In Azure and other cloud services, revenues grew 33% (up 35% in cc), including 16 points from AI services. Focused execution drove non-AI services results, where the company saw accelerated growth in the enterprise customer segment as well as some improvement in scale motions. In Azure AI services, Microsoft brought capacity online faster than expected.

When it comes to cloud migrations, Microsoft continues to see customers like Abercrombie & Fitch Co. (ANF Quick QuoteANF - Free Report) , Coca-Cola (KO Quick QuoteKO - Free Report) and ServiceNow (NOW Quick QuoteNOW - Free Report) , expanding their footprints on Azure. Microsoft remains the cloud of choice for customers’ mission-critical VMWare, SAP and Oracle workloads, with more regional availability than any other hyperscaler.

In the on-premises server business, revenues decreased 6% (down 4% in cc), slightly below expectations, due to renewals with lower in-period revenue recognition from the mix of contracts. The year-over-year decline is reflective of the continued customer shift to cloud offerings.

Enterprise and partner services revenues grew 5% (up 6% in cc), which came slightly ahead of expectations due to better-than-expected performance in Enterprise Support Services.

Segment gross margin dollars increased 13% (up 14% in cc) and gross margin percentage decreased 4 points year over year, primarily due to scaling the company’s AI infrastructure. Operating expenses rose 6% (up 7% in cc) and operating income grew 17% (up 18% in cc).

More Personal Computing segment, which primarily comprises Windows, Gaming, Devices and Search businesses, contributed 19.1% to total revenues. Revenues were $13.3 billion, which grew 6% (up 7% in cc) and came ahead of expectations due to better-than-expected results across all businesses.

Windows OEM and Devices revenues increased 3% year over year, which came ahead of expectations, as tariff uncertainty through the quarter resulted in inventory levels that remained elevated.

Search and news advertising revenue ex-TAC increased 21% (up 23% in cc), which came slightly ahead of expectations, driven by usage from a third-party partnership, better-than-expected rate expansion, and volume growth across Edge and Bing.

In Gaming, revenues increased 5% (up 6% in cc). Xbox content and services revenues rose 8% (up 9% in cc), which came ahead of expectations, driven by stronger-than-expected performance in third-party and first-party content.

Microsoft continues to transform the business and focus on margin expansion, bringing games to more than 500 million monthly active users across devices. The company ended the quarter as the top publisher by pre-orders and pre-installs on both Xbox and the PlayStation Store.

PC Game Pass revenues increased more than 45% year over year. With Xbox Play Anywhere, players can now access more than 1,000 games they can play across console and PC.

Segment gross margin dollars increased 9% (up 11% in cc). Gross margin percentage increased 2 points year over year, driven by strong execution on margin improvement in Gaming and Search.

Operating expenses increased 1%. Operating income increased 21% (up 23% in cc), driven by continued prioritization of higher margin opportunities.

Microsoft's AI Growth Highlights From Q3

Microsoft shared impressive growth across the company's AI portfolio. The Azure AI Foundry application and agent development hub has now been adopted by developers at more than 70,000 enterprises and digital-native companies. Token processing reached unprecedented levels, with Microsoft processing more than 100 trillion tokens this quarter, a fivefold increase year over year, including a record 50 trillion tokens in March alone.

Just four months after launch, Microsoft's Azure AI Agent Service has been utilized by more than 10,000 organizations to build, deploy, and scale agents. The company's Phi small language models have gained significant traction, with 38 million downloads to date. In the development space, GitHub Copilot's code review agent has handled more than eight million requests, while GitHub Copilot itself has surpassed 15 million users, representing more than fourfold growth year over year.

Microsoft 365 Copilot continues to expand its global footprint with hundreds of thousands of customers worldwide and usage is increasing threefold compared to the previous year. The company noted that Copilot's "overall deal size continues to grow," with the quarter seeing "a record number of customers returning to buy more seats." The adoption of Copilot Studio has been particularly strong, with more than 230,000 organizations, including 90% of the Fortune 500, implementing the technology.

Custom agent creation has seen remarkable growth, with customers developing more than one million custom agents across SharePoint and Copilot Studio this quarter, more than double the previous quarter. In healthcare, Dragon Copilot has made significant strides, helping document nearly 9.5 million physician-patient encounters at healthcare providers, representing growth of more than 50% quarter over quarter.

Microsoft's Strong Growth in Data Products in Q3

Microsoft reported significant growth across its data products portfolio during the third quarter of fiscal 2025. PostgreSQL usage continued its momentum for the third consecutive quarter, now being utilized by nearly 605 of Fortune 500 companies. Microsoft Fabric has shown remarkable expansion with more than 21,000 paid customers, representing an 80% increase year over year.

The company highlighted Real-Time Intelligence as Fabric's fastest-growing workload, with 40% of customers adopting it within just five months of general availability. Integration across Fabric's ecosystem is strong, with more than 50% of customers using three or more workloads. Data stored in Microsoft's multi-cloud data lake, OneLake, has experienced exponential growth, increasing more than sixfold over the past year.

Developer tools continue to show strong adoption, with Visual Studio and VS Code reaching more than 50 million monthly active users. Power Platform has expanded its user base to 56 million monthly active users, a 27 percent increase year over year. Windows 11 commercial deployments have surged nearly 75 percent year over year as Microsoft continues to prepare for Windows 10's end of support in October.

In the security segment, Microsoft now serves 1.4 million security customers, with more than 900,000 of these customers utilizing four or more workloads, representing a 21% year-over-year increase. The company's Entra identity offering now serves more than 900 million monthly active users. Microsoft also noted growth in the use of Databricks and Snowflake on Azure, though specific figures were not disclosed.

Looking toward future technologies, Microsoft is putting its quantum stack on machines from partners and making real progress on a path to a utility-scale quantum computer with the introduction of Majorana 1, the company's quantum chip unveiled in February.

Operating Results of MSFT

Gross profit increased 11.1% year over year to $48.14 billion. The gross margin contracted 140 basis points (bps) to 68.7% on a year-over-year basis, down 1 point year over year, due to the impact of scaling AI infrastructure.

Operating expenses rose 2.4% year over year to $16.14 billion, lower than expected, and operating margins increased 1 point year over year to 46%. 

At a total company level, headcount at the end of March was 2% higher than a year ago and was down slightly compared to last quarter.

Operating income was $32 billion and increased 16% (up 19% in cc). The operating margin expanded 110 bps to 45.7% on a year-over-year basis.

Productivity & Business Process operating income rose 14.8% to $17.37 billion. Intelligent Cloud operating income increased 16.6% to $11.09 billion. More Personal Computing’s operating income increased 20.6% to $3.52 billion.

Balance Sheet & Cash Flow

As of March 31, 2025, Microsoft had total cash, cash equivalents and short-term investments balance of $79.61 billion compared with $71.55 billion as of Dec. 31, 2024.

As of March 31, 2025, long-term debt (including the current portion) was $39.88 billion compared with $44.66 billion as of Dec. 31, 2024.

Cash flow from operations was $37 billion, up 16%, driven by strong cloud billings and collections, partially offset by higher tax payments. Free cash flow was $20.3 billion.

Microsoft returned $9.7 billion to shareholders in the form of dividends and share repurchases in the third quarter of fiscal 2025.

Guidance

For the fiscal fourth quarter, Microsoft expects the cost of revenues between $23.6 billion and $23.8 billion and operating expenses to grow in the $18-$18.1 billion range. Other income and expenses are expected to be roughly $(1.2) billion.

The company expects revenue growth in the productivity and business processes segment between $32.05 billion and $32.35 billion. 

MSFT expects Office 365 Commercial revenue growth to be roughly 14% at cc. Office Commercial products revenues are expected to grow in mid-single digits.

In Office Consumer products and cloud services, Microsoft expects revenue growth in mid-teens. For LinkedIn, the company expects revenue growth in high-single digits. In Dynamics, MSFT expects revenue growth in the mid-to-high teens range.

For Intelligent Cloud, Microsoft anticipates revenues between $28.75 billion and $29.05 billion. 

In Azure, MSFT expects revenue growth at cc between 34% and 35%. In Enterprise Services, revenues are expected to grow in mid-to-high single digits. The company expects Server product revenues to decline in mid-single digits.

For More Personal Computing, the company projects revenues between $12.35 billion and $12.85 billion. It expects Windows OEM revenues to decline in mid-to-high single digits.

In Gaming, this Zacks Rank #3 (Hold) company expects revenues to grow in mid-single digits. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Microsoft expects Xbox content and services revenues to grow in high-single digits.