Microsoft Raises Full-Year Outlook as AI Services Drive Record Revenue

Microsoft Corporation has raised its full-year outlook following an exceptional fiscal third quarter that saw AI services significantly accelerate the company’s growth trajectory. In Wednesday’s earnings report, the tech giant announced record quarterly revenue of $70.1 billion, a 13% year-over-year increase that handily surpassed the $68.44 billion expected by analysts, while earnings per share reached $3.46, well above the projected $3.22 according to consensus estimates from LSEG.

The strong performance prompted Microsoft to issue an optimistic outlook for the remainder of fiscal year 2025, with fourth-quarter revenue projected between $73.15 billion and $74.25 billion, exceeding analysts’ expectations of $72.26 billion. “We continue to make good progress on AI, our intelligent cloud, and the future of productivity software,” said Satya Nadella, Microsoft’s Chairman and CEO, during the earnings call. “I’m excited to see these efforts scale further in the coming quarters.”

Azure Cloud Achieves Accelerating Growth Rate

The centerpiece of Microsoft’s outstanding quarter was the performance of its Azure cloud computing service, which posted revenue growth of 33% year-over-year, significantly outpacing Wall Street expectations of approximately 30%. Notably, AI-related services contributed 16 percentage points to Azure’s overall growth, demonstrating the increasing importance of artificial intelligence to Microsoft’s cloud strategy.

This acceleration comes after concerns in previous quarters about execution challenges with non-AI Azure cloud clients. “We saw some improvement in these efforts during this quarter,” noted Amy Hood, Microsoft’s Chief Financial Officer, indicating the company has begun to address these operational issues while maintaining focus on high-growth AI initiatives. The strong Azure performance also helped the broader Intelligent Cloud segment reach $26.8 billion in revenue, a 21% increase from the same period last year.

AI Adoption Driving Cross-Portfolio Growth

Microsoft’s strategic investment in artificial intelligence is yielding benefits across its diverse product portfolio, not just in cloud services. The company reported that Microsoft 365 subscriptions with Copilot, its AI assistant, are seeing significantly higher renewal rates and customer satisfaction scores compared to standard subscriptions, driving both revenue growth and customer retention in the Productivity and Business Processes segment.

“AI scaling laws are continuing to compound across both pre-training and inference-time compute,” Nadella explained during a previous earnings call, highlighting the efficiency gains Microsoft has achieved. “On inference, we have typically seen more than 2X price-performance gain for every hardware generation, and more than 10X for every model generation due to software optimizations.” These efficiency improvements are allowing Microsoft to serve more AI workloads while managing infrastructure costs effectively.

Record Capital Expenditures Support Infrastructure Expansion

Microsoft’s capital expenditures for the quarter reached $16.75 billion (excluding finance leases), representing a nearly 53% increase compared to the same period last year and slightly exceeding analyst expectations of $16.37 billion according to Visible Alpha. This substantial investment reflects the company’s commitment to building out data center capacity for AI computing workloads, which require specialized hardware and extensive scaling.

Looking ahead, Microsoft reiterated that capital expenditures will continue to grow in fiscal year 2026, though at a slower rate than the current fiscal year. CEO Satya Nadella had previously stated that Microsoft plans to spend approximately $80 billion in fiscal 2025 on construction of data centers optimized for AI workloads, demonstrating the scale of investment required to maintain competitive advantage in the rapidly evolving AI landscape.

Competitive Position Strengthens Against Cloud Rivals

Microsoft’s strong performance in cloud computing comes as competition intensifies in the sector, particularly for AI workloads. The company’s 33% Azure growth rate compares favorably to Google Cloud’s 35% growth in its most recent quarter, suggesting Microsoft is successfully defending its position as the second-largest cloud provider behind Amazon Web Services.

“Whenever you find yourself in any kind of challenging market, just to know that you’re not alone going through it is a big deal,” said Nadella, emphasizing the company’s commitment to helping customers navigate economic uncertainties through digital transformation. This customer-centric approach, combined with Microsoft’s comprehensive AI strategy spanning infrastructure, platforms, and applications, positions the company favorably as enterprise AI adoption accelerates.

Potential Tariff Impact Remains Manageable

While many technology companies have expressed concerns about the potential impact of increasing global tariffs on their supply chains and costs, Microsoft appears relatively well-positioned to weather these challenges. The company primarily generates revenue from software and cloud services rather than hardware, making it less vulnerable to tariffs that primarily target physical goods and manufacturing.

“Microsoft is less vulnerable to tariffs that primarily target goods and manufacturing,” noted GeekWire in their earnings preview, highlighting the company’s resilience in the face of geopolitical and trade uncertainties. Nevertheless, Microsoft acknowledged that its data center equipment imports could face increased costs depending on how tariff policies evolve, though the company has diversified its supply chain to mitigate these risks.