Microsoft Cloud Revenue Soars as Hyperscalers See AI Boost

Skyrocketing cloud services revenues and customers' AI investments helped bring Microsoft's latest quarterly earnings to $65.6 billion.

Microsoft on Wednesday revealed financial results for its fiscal year 2025 first quarter, which ended Sept. 30. Overall Microsoft revenue for the quarter totaled $61.9 billion, an increase of 17%. Perhaps more importantly, revenue growth in the company's hyperscaler business is helping leadership make the case that its investments in infrastructure for artificial intelligence solutions are paying off.

Microsoft chairman and CEO Satya Nadella said Microsoft expects its AI practice to log an annual revenue run rate of $10 billion in the next quarter. That would occur in record time for any Microsoft business.

“AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process," Nadella said in a statement. “We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage.”

Microsoft's Satya Nadella

Microsoft Cloud Revenue and AI

The intelligent cloud unit of Microsoft, which contains public cloud platform Azure, grew 20% year-over-year to $24.1 billion for the IT giant, outpacing Microsoft's productivity ($28.3 billion) and personal computing ($13.2 billion) businesses. Azure and "other cloud services" specifically grew 33% from a year prior.

Related:Investors to Microsoft: Where's the AI Payoff?

The OpenAI investor attributed 12 percentage points of growth to its AI services, and executives hailed the numbers as a validation for their steep investments in AI infrastructure. Microsoft Cloud's gross margin percentage decreased from 73% to 71% year-over-year "driven by scaling our AI infrastructure."

"We expect capital expenditures to increase on a sequential basis given our cloud and AI demand signals. As I said last quarter, we will stay aligned, and if needed adjust, to the demand signals we see," Microsoft chief financial officer Amy Hood said in the earnings call. "As a reminder, there can be quarterly spend variability from cloud infrastructure buildouts and the timing of delivery of finance leases."

Executives told investors that demand for Microsoft AI solutions currently exceeds the vendor's capacity. Nadella said Azure OpenAI usage has increased by more than double over the last half-year.

On the productivity side, commercial revenue for Microsoft 365 (which includes the OpenAI-based Copilot tool) grew 13%, and seats grew by 8%. Daily Microsoft 365 Copilot users are doubling quarter-over-quarter, Nadella said.

Related:Brutal Day on Wall Street Raises 'AI Bubble' Concerns for Nvidia, More

Commercial bookings across the portfolio grew 30%, with Microsoft citing "large, long-term Azure contracts." Microsoft did note, however, that enterprise and partner services revenue declined 1%.

Google Cloud Sees Similar Boost

Rival hyperscaler platform Google Cloud also celebrated its gains this week. Google Cloud accounted for $11.4 billion of parent company Alphabet's $88.3 billion in the quarter, but Google Cloud revenues grew 35%. Alphabet CEO Sundar Pichair noted that Google Cloud is tapping into AI through infrastructure, its Vertix platform for customizing foundational models, the Gemini-connected BigQuery data platform, AI-based cybersecurity offerings, and most recently a customer engagement suite.

"Our technology leadership and AI portfolio are helping us attract new customers, win larger deals, and drive 30% deeper product adoption with existing customers," Pichair said in the earnings call.

Amazon Web Services (AWS), another popular hyperscaler, will announce its earnings on Thursday.