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💻 Microsoft: AI Crossroads

💻 Microsoft: AI Crossroads

Record cloud growth meets OpenAI turmoil

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App Economy Insights
Jul 31, 2025
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How They Make Money
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💻 Microsoft: AI Crossroads
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Welcome to the Premium edition of How They Make Money.

Over 230,000 subscribers turn to us for business and investment insights.

In case you missed it:

  • 🎨 Figma Files for IPO

  • 🧠 OpenAI: Beyond ChatGPT

  • 🔎 Google: AI Push Intensifies

  • 📊 PRO: SAP, IBM, ServiceNow…


Microsoft GIF - Find on GIFER

Microsoft (MSFT) just closed its fiscal year with a blowout quarter.

Revenue smashed expectations across every segment, Azure growth hit 39%, and Copilot adoption is accelerating. GPT‑5 is days away, and Microsoft will have exclusive access.

But a high‑stakes rift with OpenAI is emerging, and the outcome could define Microsoft’s AI edge for years to come.

Here’s what stood out this quarter.

Today at a glance:

  1. Microsoft’s Q4 FY25.

  2. OpenAI drama and risks.

  3. Earnings call takeaways.

  4. What moves the needle.


1. Microsoft’s Q4 FY25

Income Statement:

  • Revenue +18% Y/Y to $76.4B ($2.6B beat).

  • Gross margin 69% (-1pp Y/Y).

  • Operating margin 45% (+2pp Y/Y).

  • EPS $3.65 ($0.27 beat).

Product and Services Breakdown:

  • ☁️ Server products and cloud services $27.8 billion (+27% Y/Y).

  • 📊 M365 Commercial products and cloud services $24.3 billion (+16% Y/Y).

  • 🎮 Gaming $5.5 billion (+10% Y/Y).

  • 👔 LinkedIn $4.6 billion (+9% Y/Y).

  • 🪟 Windows and Devices $4.3 billion (+2% Y/Y).

  • 🔎 Search and news advertising $3.6 billion (+17% Y/Y).

  • 💻 Other $6.2 billion (+15% Y/Y).

Core business segments:

As a reminder, Microsoft restructured its business segments last year to better align reporting with current operations:

  • 📊 Productivity and Business Processes grew 16% Y/Y to $33.1 billion ($1.0 billion beat). M365 Commercial and Consumer drove upside, with Copilot adoption fueling ARPU gains.

  • ☁️ Intelligent Cloud grew 26% Y/Y to $29.9 billion ($0.8 billion beat), driven by Azure across all workloads.

  • 🎮 More Personal Computing grew 9% Y/Y to $13.5 billion ($0.8 billion beat), with Search and XBOX content driving the upside.

Key Trends:

The table below compares growth year-over-year in constant currency following the new segmentation. Many of the products and services overlap.

  • Microsoft Cloud—spanning Azure, M365, and more—grew 25% Y/Y to $46.7 billion. It now accounts for 61% of total revenue, up 4pp Y/Y.

  • Azure is running the show and driving the growth of ‘Server products and cloud services’ and Microsoft Cloud.

  • Consumer products saw a big acceleration on the M365 side, boosted by an ARPU growth from the recent price increase and subscriber growth of 8%.

  • Xbox growth has normalized after the Activision acquisition completed in Q2 FY24, but Game Pass has offset a 22% decline in hardware sales.

Cash flow:

  • Operating cash flow grew 15% Y/Y to $42.6 billion.

  • Free cash flow grew 10% Y/Y to $25.6 billion, reflecting higher Capex.

Balance sheet:

  • Cash, cash equivalents, and investments: $95 billion.

  • Long-term debt: $40 billion.

So what to make of all this?

  • 📈 Azure hits a new high: Azure grew 39% Y/Y, far ahead of the 34-35% outlook, driven by core infrastructure demand from large enterprise customers. Surprisingly, management did not share the AI contribution to Azure’s growth this time. But they shared that Azure sales reached $75 billion in the past 12 months (+34% Y/Y). For context, Google Cloud was $49 billion and AWS $112 billion as of March.

  • 🚧 Capacity constrained: Like other hyperscalers, Microsoft’s cloud growth remains constrained by data center shortages. For now, AI-driven demand is outpacing supply, limiting faster acceleration.

  • 💰 Capex soared 27% Y/Y to $24.2 billion: Microsoft is spending aggressively to expand AI infrastructure, catching up with AI demand.

  • 🔎 Search and ads steady: Search and news advertising (ex‑TAC) rose 20% Y/Y, benefiting from volume growth and third‑party partnerships. This segment increasingly captures AI features like Copilot Pro alongside Bing and Edge.

  • 📊 Strong bookings: Commercial bookings climbed 37% Y/Y to over $100 billion, lifting total remaining performance obligations to $368 billion (+37% Y/Y). About 35% of this will convert to revenue over the next 12 months, giving strong forward visibility.

  • 🔺 Margins resilient: Gross margin held at 69%, flat Q/Q, while operating margin improved 2pp Y/Y despite restructuring charges tied to recent layoffs. Efficiency gains helped offset AI infrastructure drag.

  • 🧠 OpenAI’s impact: “Other expenses” of $1.7 billion largely reflect Microsoft’s share of OpenAI’s losses under equity accounting, a growing line item as OpenAI scales aggressively toward GPT‑5.

  • 📅 FY26 guidance: Management guides to double‑digit revenue and operating income growth in FY26, with Azure up ~37% in Q1 (September quarter). Capacity constraints will linger through H1, but CapEx growth is expected to moderate versus FY25.


2. OpenAI drama and risks

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