Microsoft talks up 'significant capital investments' in AI as sector reacts to DeepSeek

Microsoft's latest earnings results exceeded expectations, yet comments from CEO Satya Nadella and CFO Amy Hood signaled turbulence in AI and execution, alongside signs of waning cloud demand.

Total revenue for the tech giant's Q2 2025, ended December 31 last year, was $69.6 billion, up 12 percent on the same time last year. Windows OEM and Devices revenue increased 4 percent – Nadella noted "momentum" as the end of Windows 10 support approaches – while revenue from More Personal Computing remained relatively flat at $14.7 billion.

According to Hood, Microsoft Cloud revenue was up 21 percent year-on-year to $40.9 billion, although the gross margin dropped slightly, "driven by scaling our AI infrastructure."

Better-than-expected results in AI services served to offset the lower-than-expected results in Azure's non-AI services and enterprise and partner services. While revenue from Azure and other cloud services grew by 31 percent, this was still below expectations and attributed by Hood to "go-to-market execution challenges."

Microsoft's outlook for the next quarter was slightly less than investors had hoped for with a forecast top line of between $67.7 and $68.7 billion, when analysts had expected $69.8 billion. Microsoft shares were slightly down on the news.

Those "execution challenges" the CFO spoke about had to do with balancing AI workloads with other fundamentals.

Revenue from the company's on-premises server software business declined 3 percent, driven by customers not buying as much Windows Server 2025 as Microsoft was expecting.

AI services is one area where Microsoft is starting to show strain. Not in terms of a reduction in demand – quite the opposite. Revenue from AI services grew by 157 percent year-on-year, ahead of Microsoft's expectations. However, Hood warned that "demand continued to be higher than our available capacity."

"While we expect to be AI capacity constrained in Q3, by the end of FY25 we should be roughly in line with near-term demand given our significant capital investments."

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It's not ideal, particularly considering the effort Microsoft has put into forcing AI and Copilot on any customer unable to get out of the way in time, as well as the company's upbeat tone regarding the technology during its earnings call.

Hood said: "Usage intensity increased more than 60 percent quarter-over-quarter," but did not translate that into financial figures.

OK, we spent a lot, but..

However, the advent of DeepSeek and the inevitable questions it raises regarding cost also featured in Microsoft's thinking. The company has invested heavily in AI technology, and has vowed to continue. It has committed to investing a whopping $80 billion this year in building out infrastructure to train and deploy AI models.

Meanwhile, Meta boss Mark Zuckerberg was defensive about spending on the Facebook parent's post-earnings call, saying: "Investing 'very heavily' in capital expenditure and infrastructure is going to be a strategic advantage over time."

Yet Nadella's reaction to the technology on the Microsoft analysts' call was interesting. He said: "When token prices fall, inference computing prices fall, that means people can consume more."

Basically, a situation where some elements in the AI stack become cheaper and more efficient is OK for Microsoft specifically, because it just means usage will go up. Or, as Nadella put it, "AI will be much more ubiquitous. And so, therefore, for a hyperscaler like us, a PC platform provider like us, this is all good news as far as I'm concerned."

The house, it seems, always wins. ®