Microsoft Corp. delivered a solid earnings beat for its fiscal second quarter ended December 31, 2025, with adjusted earnings per share of $4.14, surpassing the Wall Street consensus of $3.97 and revenue of $81.27 billion, which exceeded the expected $80.27 billion.
Yet the stock plunged as much as 7% in extended trading on Wednesday, reflecting investor concerns over decelerating Azure cloud growth, heavy AI-related capital spending, and concentration risk in its massive backlog tied to OpenAI commitments.
Total revenue rose 17% year-over-year (15% in constant currency) to $81.3 billion, driven by strong performance across its cloud and productivity segments. Net income on a GAAP basis reached $38.5 billion, or $5.16 per share, up significantly from $24.11 billion ($3.23 per share) in the prior-year quarter, bolstered by a $7.6 billion dilution gain from OpenAI’s restructuring into a public-benefit corporation that reduced Microsoft’s ownership stake.
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The Microsoft Cloud segment, encompassing Azure, Office 365, Dynamics 365, and LinkedIn, crossed $50 billion in quarterly revenue for the first time at $51.5 billion, up 26% (24% constant currency). Within that, the Intelligent Cloud group—including Azure and server products—generated $32.9 billion, advancing 29% (28% constant currency) and exceeding StreetAccount’s $32.4 billion estimate.
Azure and other cloud services specifically grew 39% (38% constant currency), a modest slowdown from the prior quarter’s 40% pace and slightly below some analyst forecasts of 39.4%. Guidance for the fiscal third quarter (ending March 2026) called for revenue of $80.65 billion to $81.75 billion, with the midpoint of $81.2 billion aligning closely with the $81.19 billion LSEG consensus. Azure growth was projected at 37% to 38% in constant currency, matching StreetAccount’s 37.1% view.
The implied operating margin for the quarter is around 45.1%, below StreetAccount’s 45.5% consensus, as the company continues pouring resources into AI compute capacity and talent. Chief Financial Officer Amy Hood highlighted the strength of the commercial remaining performance obligation (RPO)—a forward-looking measure of committed but unearned revenue—which ballooned 110% to $625 billion at quarter-end. Approximately 45% of this backlog stems from OpenAI’s $250 billion cloud commitment during the period, with the remaining portion growing 28% and described as “larger than most peers, more diversified than most peers.”
Hood emphasized Microsoft’s role as OpenAI’s “provider of scale,” while analysts like Jefferies’ Brent Thill raised questions about OpenAI’s ability to meet its financial obligations to Microsoft, Oracle, and other partners. Commercial bookings growth accelerated sharply to 230% from 112% in the prior quarter, reflecting robust enterprise demand for AI-infused services.
Microsoft 365 Copilot, the AI-powered add-on for Office productivity tools, now boasts 15 million paid commercial seats—up from prior undisclosed figures—within a base exceeding 450 million paid commercial Microsoft 365 seats, signaling meaningful but still early adoption. Capital expenditures and finance leases surged 66% to $37.5 billion, well above Visible Alpha’s $34.31 billion estimate, as Microsoft added nearly one gigawatt of AI compute capacity in the quarter alone.
Nadella noted customer demand continues to outstrip supply, requiring careful balancing between Azure allocations, first-party AI usage in Copilot and GitHub Copilot, R&D acceleration, and infrastructure refreshes. The Productivity and Business Processes segment, including Office, Dynamics 365, and LinkedIn, delivered $34.12 billion in revenue, up 16% and above StreetAccount’s $33.48 billion consensus. More Personal Computing—covering Windows, Xbox, Surface, and Bing—fell 3% to $14.25 billion, below the $14.38 billion estimate, dragged by a 9.5% decline in gaming revenue and an unspecified impairment charge in the division.
The results cap a period of heavy AI investment, with Microsoft raising prices on commercial Office subscriptions and securing a $30 billion cloud deal from Anthropic alongside capacity commitments. Despite the beat, the stock’s 11% decline over the past three months (versus the S&P 500’s 1% gain) reflects broader concerns that generative AI could disrupt traditional software growth, compounded by the heavy spending required to meet demand.
Now, Microsoft navigates this AI-driven inflection point, with the focus shifting to execution: converting its massive backlog into sustained revenue, managing capex without eroding margins, and proving Copilot’s monetization potential.