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Microsoft has reported solid earnings, but there’s a noticeable decline in the growth of its intelligent cloud operating income. Specifically, for the second quarter of its fiscal year 2025, Microsoft observed a revenue increase of $1.3 billion, translating to a 14% growth. This is a significant drop compared to the same quarter in 2024, where the growth was $3.6 billion, or an impressive 40%.

This downturn is largely attributed to Microsoft’s substantial investments in generative AI, common among major cloud providers. The complexity of the situation is underscored by how percentage figures can be misleading, especially as the base numbers grow larger over time.

A Microsoft insider noted that the financial numbers currently available may not be up-to-date but essentially reflect unchanged trends. The main driver of the slowing growth rate is Microsoft’s aggressive expansion of its AI infrastructure, a strategy that entails higher expenditures compared to competitors like Google and AWS.

The AI sector’s rapid expansion has also strained resources, with Microsoft facing capacity constraints. There’s a demand for AI services that exceeds the capabilities they can currently meet, despite having $298 billion in unfulfilled contracts.

Forrester’s Principal Analyst, Lee Sustar, remarked that while Microsoft’s top-line revenues are still rising due to AI offerings, its cloud segment’s operating expenses increased by 10%, indicating that maintaining momentum in AI is becoming increasingly costly. Investors are closely monitoring how Microsoft will manage these sentiments, particularly after a noted 70% reduction in gross margin attributed to the costs of expanding AI infrastructure.

Jason Anderson from Moor Insights & Strategy suggests that the downward trend in Microsoft’s growth percentages is anticipated given changes in operational dynamics, including increased automation and the deployment of more efficient technologies like ARM-based chips.

Conversely, Scott Bickley from Info-Tech Research Group did not find anything particularly eye-catching in Microsoft’s recent earnings report, asserting that the company remains optimistic, forecasting a 30% growth. He views Microsoft’s commitment to investing in AI infrastructure as crucial for maintaining competitive advantage in this landscape, akin to a modern arms race.

Sustar also anticipates that Chief Information Officers (CIOs) will begin demanding clearer explanations regarding the costs associated with services. As costs for commodity cloud services soar—Google, for instance, reported a $1 billion deficit in a single quarter—it’s likely that CIOs will start to scrutinize pricing strategies and the distinction between standard services and premium offerings.

This scrutiny may lead to more discerning conversations about the advantages of consolidating services with a single provider versus potentially overpaying for expansive cloud management due to aggressive pricing strategies.


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