Microsoft AI revenue hits $13B annually, but cloud growth disappoints investors

Microsoft has announced that its AI business and services have helped generate revenue at an annual rate of $13 billion, much higher than previously projected. In its Q2 2025 earnings report, the tech giant said it had generated $69.6 billion in revenue for the quarter, a 12% jump from last year. Net income also saw a solid climb, rising 10% year-over-year to hit $24.1 billion. However, it reported weaker-than-expected forecasts for its cloud computing business.

The company’s CEO, Satya Nadella, said in a statement: “We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead.

“Already, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year.”

That said, Microsoft’s outlook for its cloud computing business fell short of expectations, causing its stock to drop 4.5% in after-hours trading. Investors are said to be getting nervous about high spending, uncertain AI revenue, and growing competition from cheaper AI models out of China, like DeepSeek.

Microsoft was the first big cloud company to report earnings since the Chinese AI model made headlines, and its stock took a hit, dropping about 5% in after-hours trading.

While the Redmond-based company’s Azure and cloud services business grew 31% year-over-year, it was slower than the 33% growth it saw in the previous quarter.

Nadella told investors during a call: “As A.I. becomes more efficient and accessible, we will see exponentially more demand.

“Therefore, much as we have done with the commercial cloud, we are focused on continuously scaling our fleet globally and maintaining the right balance across training and inference, as well as distribution.”

When it comes to gaming, Microsoft saw a 7% drop in revenue, with Xbox hardware sales down 29%. The company has been shifting away from a hardware-first approach, pushing messages like its “This is an Xbox” campaign and expanding Xbox Game Studios titles to other platforms. The strategy shift could be playing a role in the decline.

Microsoft Earnings | Q2 FY2025 Xbox and Gaming Division Details