Microsoft promises more AI spending despite cloud cost stumble
Microsoft posted revenue and earnings growth in its latest quarterly results, but shares still tumbled after reporting higher than expected costs in its cloud segment.
Microsoft posted second quarter revenue of $69.6bn, up 12%, while operating income hit $31.7bn, up 17%.
Breaking down the results, Microsoft highlighted 14% growth in productivity and business processes. This included a 15% leap in Microsoft 365 commercial products and cloud services revenues, with an 8% increase in Microsoft 365 for consumers.
On the devices front, Windows OEM and devices revenue was up 4%.
“We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead,” said Satya Nadella, chairman and chief executive officer of Microsoft.
“Already, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year.”
Cloud cost concerns hamper Microsoft earnings
Notably, Microsoft’s Intelligent Cloud division drew attention from investors despite a 19% increase in revenue to $25.5 billion. This segment not only performed below expectations but also saw rising costs.
Forrester principal analyst Lee Sustar said this highlights the significant investment required to maintain Microsoft’s sharp AI focus and associated infrastructure expansion efforts.
“While Microsoft’s topline earnings continue to rack up big gains as the result of its AI offerings, the company’s Intelligent Cloud segment, which includes Azure and various other services, saw operating expenses spike 10%, a sign that maintaining AI momentum is getting expensive,” he said.
“Tensions with OpenAI, Microsoft’s planned $80 billion in investments in data centers, and a potential AI services price war driven by DeepSeek pose new challenges,” Sustar added.
“Investors and customers are watching closely to see if Microsoft can continue to deliver after the company noted a 70% decline in gross margin for Microsoft Cloud as the result of scaling out AI infrastructure.”
Amy Hood, executive vice president and chief financial officer at Microsoft, noted that cloud revenue was $40.9 billion — up by more than a fifth year on year — but acknowledged the concerns around rising costs.
“We remain committed to balancing operational discipline with continued investments in our cloud and AI infrastructure.”
In a conference call to discuss the results, Hood revealed that more than half of cloud and AI-related spending at the firm was directed toward “long-lived assets that will support monetization over the next 15 years and beyond”.
“The remaining cloud and AI spend was primarily for servers, both CPUs and GPUs, to serve customers based on demand signals including our customer contracted backlog.”
The AI investment surge is not over
Despite the cost concerns — and the disruption sparked by the arrival of cheaper model DeepSeek, which reportedly cost just $6 million to build — Microsoft and other tech giants said that AI investment would continue.
In that conference call, when asked about investing in future training for OpenAI’s models, Nadella said Microsoft remained “very happy with the partnership with OpenAI”.
“And as AI becomes more efficient and accessible, we will see exponentially more demand,” he added.
Hood, meanwhile, said Microsoft will increase spending on AI next year but at a slower rate, explaining that the company was racing to catch up in terms of infrastructure and capacity.
Microsoft has previously said it will invest up to $80 billion in AI this year.
That was echoed by Meta, which said it plans to invest heavily in this domain over the course of 2025, spending as much as $65 billion.
Discussing Meta’s results, CEO Mark Zuckerberg said on a conference call: “Investing very heavily in capital expenditure and infrastructure is going to be a strategic advantage over time.”
But investors continued to call for evidence that big tech’s AI bet would pay off.
Futurum Group analyst Daniel Newman told Reuters that the combination of DeepSeek and these results was a “wake up call”.
“For AI right now, there’s too much capital expenditure, not enough consumption,” he added.
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