Microsoft Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2025

Key Takeaways

  • Record Microsoft Cloud revenue of $42.4 billion (up 22% in constant currency) in Q3, driven by robust AI and cloud adoption.
  • Azure growth accelerated 33% in constant currency with 16 points from AI services, while non-AI cloud services also outperformed expectations.
  • Strong financial results: Q3 revenue of $70.1 billion (up 13% in constant currency) and EPS of $3.46 (up 18% in constant currency), both exceeding guidance due to cloud and AI demand.
  • Key product momentum: Microsoft Fabric users grew 80% year-over-year to 21,000 paid customers, and GitHub Copilot users quadrupled to over 15 million.
  • Q4 outlook projects Microsoft Cloud gross margin declining to ~67% as AI infrastructure scales, capex rising sequentially, and Windows OEM revenue falling mid-single digits.
AI Generated. May Contain Errors.
Earnings Conference Call
Microsoft Q3 2025
00:00 / 00:00

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Operator

Greetings, and welcome to the Microsoft Fiscal Year twenty twenty five Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Nielsen, Vice President of Investor Relations. Please go ahead.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer Amy Hood, Chief Financial Officer Alex Jolla, Chief Accounting Officer and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non GAAP items.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

The non GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying business performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rates only.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward looking statements, which are predictions, projections or other statements about future events.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factors section of our Form 10 ks, Forms 10 Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward looking statement. And with that, I'll turn the call over to Satya.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Thank you, Jonathan. It was a record quarter driven by continued strength of Microsoft Cloud, which surpassed $42,000,000,000 in revenue, up 22% in constant currency. Cloud and AI are the essential inputs for every business to expand output, reduce costs and accelerate growth. Now I'll highlight examples starting with infrastructure. We continue to expand our data center capacity.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

This quarter alone, we opened DCs in 10 countries across four continents. Model capabilities are doubling in performance every six months, thanks to multiple compounding scaling laws. We continue to optimize and drive efficiencies across every layer from DC design to hardware and silicon to system software to model optimization all towards lowering costs and increasing performance. You see this in our supply chain where we have reduced dock to lead times for new GPUs by nearly 20% across our blended fleet where we have increased AI performance by nearly 30% ISO power and our cost per token, which is more than halved. When it comes to cloud migrations, we saw accelerating demand with customers in every industry from Abercrombie and French to Coca Cola and ServiceNow, expanding their footprints on Azure.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And we remain the cloud of choice for customers' mission critical VMware, SAP and Oracle workloads with more regional availability than any other hyperscaler. We're also excited about the next frontier in cloud systems with Quantum. In addition to putting our Quantum stack on machines from our partners, we're also making real progress on a path to a utility scale quantum computer with the introduction of Majorana One. When it comes to data and analytics, we have deeply integrated our AI platform with our data stack. PostgreSQL usage accelerated for the third consecutive quarter and it is now used by nearly 60% of the Fortune 500, including companies like BMW and BNY Mellon.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Cosmos DB revenue growth also accelerated again this quarter and remains the go to database for globally distributed NoSQL workloads at any scale. It is used by customers in every industry like CarMax, DocuSign, NTT Data and OpenAI. This quarter, we also saw analytics consumption accelerate. Microsoft Fabric has more than 21,000 paid customers, up 80% year over year. Fabric brings together data workloads like data warehousing, data science, real time intelligence along with Power BI into one end to end solution.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Real time intelligence is now the fastest growing workload in fabric with 40% of customers already using it in just five months since becoming generally available. All up more than 50% of fabric customers like AmorePacific, Louisiana State Government and Petrobras use three or more workloads. And the amount of data in our multi cloud data lake, OneLake has grown more than 6x over the past year. Now on to AI Platform and Tools. Foundry is the agent in AI app factory.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

It's now used by developers at over 70,000 enterprises and digital natives from Atomic Work to Epic, Fujitsu and Gainsight to H and R Block and LG Electronics to design, customize and manage their AI apps and agents. We processed over 100,000,000,000,000 tokens this quarter, up 5x year over year, including a record 50,000,000,000,000 tokens last month alone. And four months in, over 10,000 organizations have used our new agent service to build, deploy and scale their agents. This quarter, we also made a new suite of fine tuning tools available to customers with industry leading reliability. And we brought the latest models from OpenAI along with new models from Cohere, DeepSeek, Meta, Mistral, Stability to Foundry.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And we've expanded our PHY family of SLMs with new multimodal and mini models. All up PHY has been downloaded 38,000,000 times. And our research teams are taking it one step further with BitNet B1.58, a billion parameter large language model that can run on just CPUs coming to the foundry. Now on to developer tools. We are evolving GitHub Copilot from pair to peer programmer.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

With agent mode in Versus Code, Copilot can now iterate on code, recognize errors and fix them automatically. This adds to other Copilot agents like AutoFix, which helps developers remediate vulnerabilities as well as Code Review Agent, which has already reviewed over 8,000,000 pull requests. And we are previewing a first of its kind SWE Agent capable of synchronously executing developer tasks. All up, we now have over 15,000,000 GitHub Copilot users up over 4x year over year. And both digital natives like Twilio and enterprises like Cisco, HPE, Skyscanner and Target continue to choose GitHub Copilot to equip their developers with AI throughout the entire dev life cycle. With Visual Studio and Versus Code, we have the world's most popular editor with over 50,000,000 monthly active users.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And with Power Platform, we have the leading low code platform for AI makers too. We now have 56,000,000 monthly active Power Platform users, up 27% year over year, who increasingly use our AI features to build apps and automate processes. Now on to future of work. Microsoft three sixty five Copilot is built to facilitate human agent collaboration. Hundreds of thousands of customers across geographies and industries now use Copilot, up 3x year over year.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Our overall deal size continues to grow and this quarter we saw a record number of customers returning to buy more seats. And we are going further. Just last week, we announced a major update bringing together agents, notebooks, search and create into a new scaffolding for work. Our new researcher and analyst deep reasoning agents analyze vast amounts of web and enterprise data to deliver highly skilled expertise on demand directly within Copilot. Beyond horizontal knowledge work, we are introducing agents for every role and business process.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Our sales agent turns contacts into qualified leads and with Sales Chat reps can quickly get up to speed on new accounts and our customer service agent is deflecting customer inquiries and helping service reps resolve issues faster. With Copilot Studio, customers can extend Copilot and build their own agents with no code, low code. More than 230,000 organizations including 90% of the Fortune 500 have already used Copilot Studio. With deep reasoning and agent flows in Copilot Studio, customers can build agents that perform more complex tasks and also handle deterministic scenarios like document processing and financial approvals. And they can now build computer use agents that take action on the UI across desktop and web apps.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And with just a click they can turn any SharePoint site into an agent too. This quarter alone customers created over 1,000,000 custom agents across SharePoint and Copilot Studio, up 130 quarter over quarter. When it comes to business applications, Dynamics three sixty five again took share as companies like Avaya, Brunswick, Softcat switched to Dynamics from legacy providers. Verizon for example chose Dynamics three sixty five sales to improve the efficiency of its sellers. In Healthcare, Dragon Co Pilot is off to a fast start.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Last quarter alone we helped document nearly 9,500,000 physician patient encounters at providers like City of Hope, Ottawa Hospital, Tufts Medicine and Wellstar up over 50% quarter over quarter. In manufacturing, we introduced factory operations and safety agents at Hanover Massay and leading partners like Autodesk, PTC and Siemens have all built their own industrial AI solutions on our stack. And in retail, we have introduced agents to help customers like Bath and Body Works build more personalized shopping experience and improve store operations. When it comes to Windows Copilot plus PCs are faster and have better battery life than any other device in their category. We also continue to win new customers with best in class AI capabilities.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

We offer a growing number of AI apps from partners like Adobe, Canva and Zoom. Just last week, we rolled out exclusive AI experiences like Recall, Click to Do and Windows Search to all Copilot plus PCs. And we continue to see increased commercial traction as we approach end of support for Windows 10. Windows 11 commercial deployments increased nearly 75% year over year. Now on to security.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Security is our top priority and we have made significant progress against the engineering objectives we outlined a year and a half ago as part of our Secure Future initiative. We are now applying these learnings to deliver new innovation across our platform. Last month along with our partners, we introduced security copilot agents to help defenders autonomously handle high volume security and IT tasks informed by 84,000,000,000,000 daily threat signals. We also added new capabilities to Defender, Entra and Purview to help organizations secure and govern their AI deployments. All up, we now have 1,400,000 secondurity customers, over 900,000 including Global, ManpowerGroup, TriNet, Regions Bank have four or more workloads, up 21% year over year.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And in Identity, Entra now has more than 900,000,000 monthly active users. Now on to our consumer businesses, starting with LinkedIn. Over 1,000,000,000 professionals use LinkedIn to connect, learn, hire and sell and our membership continues to grow at double digits year over year. Time spent watching videos on the platform was up 36% and comments were up 32% year over year. We're also seeing more members use AI to gain new skills and find jobs.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

The number of learners who have used AI powered coaching increased over 2x quarter over quarter. And we remain the market leader in hiring as customers like Equinix and Verizon use LinkedIn hiring assistance to find qualified candidates faster. When it comes to LinkedIn Premium, we saw over 75% quarter over quarter subscriber growth to our Premium Pages offering for SMBs. And LinkedIn marketing solution continues to be the best way to reach B2B decision makers with two consecutive quarters of accelerated revenue growth. More broadly, when it comes to advertising, we are transforming how people search, browse, discover content and use AI as a personal assistant.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

With Copilot Search in Bing, we are reimagining search results with overview pages curated by AI and embedded conversational capabilities. With Copilot Vision and Edge, Copilot sees what you see and gives you real time responses while you browse. With Copilot Discover, we are personalizing experience based on user interactions and preferences. And with our updated Copilot app, we are focused on building daily engagement and successful sessions across a range of modalities, whether it is conversing, searching, shopping or travel planning. All up, we again took share across Bing and Edge and our total advertising revenue across our businesses has surpassed $20,000,000,000 over the past twelve months.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Now on to Gaming. We continue to transform the business and focus on margin expansion as we bring our games to over 500,000,000 monthly active users across devices. We ended the quarter as the top publisher by pre orders and pre installs on both Xbox and PlayStation Store. PC Game Pass revenue increased over 45% year over year with Xbox Play Anywhere players now can access more than 1,000 games they can play across console and PC. And just last week, we brought cloud gaming to LG TVs.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Cloud gaming set a new record surpassing 150,000,000 hours played for the first time this quarter. We are also integrating AI across the Xbox. New Copilot for Gaming is a personalized gaming companion that provides in game assistant and expert coaching and our first of its kind Muse model can generate gameplay in real time. Finally, it's fantastic to see the success of the Minecraft movie, which is the top grossing film of the year. In addition to monetizing our IP in new ways, we have seen a 75% plus increase in weekly active users of the game year over year since the release.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

In closing, we are rapidly innovating opportunity across both consumer and commercial businesses. In just a few weeks at our BUILD conference, we'll share how we are creating the most powerful AI platform for developers and I encourage you to tune in. With that, let me turn it over to Amy.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Thank you, Satya, and good afternoon, everyone. This quarter revenue was $70,100,000,000 up 1315% in constant currency. Gross margin dollars increased 1113% in constant currency, while operating income increased 1619% in constant currency. And earnings per share was $3.46 an increase of 1819% in constant currency. Results exceeded expectations driven by focused execution from our sales and partner teams.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

We continue to see strong demand for our cloud and AI offerings as they help customers drive productivity, increase efficiencies and grow their businesses. And again this quarter revenue from our AI business was above expectations. Commercial bookings increased 1817% in constant currency significantly ahead of expectations again this quarter driven by an Azure commitment from OpenAI. We also saw consistent execution across our core annuity sales motions and continued long term commitments to our platform. Commercial remaining performance obligation increased to $315,000,000,000 up 3433% in constant currency.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Roughly 40% will be recognized in revenue in the next twelve months up 17% year over year. The remaining portion recognized beyond the next twelve months increased 47%. And this quarter our annuity mix was 98%. FX was roughly in line with expectations on total company revenue, segment level revenue and operating expense growth. FX decreased COGS growth by only one point, one point unfavorable to expectations.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Microsoft Cloud revenue was $42,400,000,000 ahead of expectations and grew 2022% in constant currency. Microsoft Cloud gross margin percentage was 69% in line with expectations and decreased three points year over year driven by the impact of scaling our AI infrastructure. Company gross margin percentage was also 69% down one point year over year driven by scaling our AI infrastructure. Operating expenses increased 23% in constant currency lower than expected due to our focus on cost efficiencies as well as investments that shifted to Q4. Operating margins increased one point year over year to 46% better than expected as we continue to focus on building high performing teams and increasing our agility by reducing layers with fewer managers.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

At a total company level, headcount at the March was 2% higher than a year ago and was down slightly compared to last quarter. Now to our segment results. Revenue from Productivity and Business Processes was $29,900,000,000 and grew 1013% in constant currency ahead of expectations driven by LinkedIn, Microsoft three sixty five Commercial Products and Microsoft three sixty five Consumer. M365 Commercial Cloud revenue increased 1215% in constant currency in line with expectations. ARPU growth was again driven by E5 and M365 Copilot.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

With M365 Copilot, we continue to see growth across customer segments and geos. Paid M365 commercial seats grew 7% year over year to over $430,000,000 While we continue to see installed base expansion across all customer segments growth was primarily driven by our small and medium business and frontline worker offerings. M365 commercial products revenue increased 58% in constant currency ahead of expectations due to higher than expected office transactional purchasing. M365 consumer cloud revenue increased 1012% in constant currency ahead of expectations driven by higher than expected subscription growth following the January price increase. M365 consumer subscriptions grew 9% to $87,700,000 LinkedIn revenue increased seven percent and eight percent in constant currency.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Results were ahead of expectations due to better than expected performance across all businesses. The Talent Solutions business continues to be impacted by weakness in the hiring market. Dynamics three sixty five revenue increased 1618% in constant currency in line with expectations with continued growth across all workloads. Segment gross margin dollars increased 1013% in constant currency and gross margin percentage was relatively unchanged year over year even with the impact of scaling our AI infrastructure. Operating expenses increased 12% in constant currency and operating income increased 1518% in constant currency.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Next, the Intelligent Cloud segment. Revenue was $26,800,000,000 and grew 2122% in constant currency ahead of expectations driven by Azure. In Azure and other cloud services revenue grew 3335% in constant currency including 16 points from AI services. Focused execution drove non AI services results where we saw accelerated growth in our enterprise customer segment as well as some improvement in our scale motions. And in Azure AI services we brought capacity online faster than expected.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

In our on premises server business revenue decreased 64% in constant currency slightly below expectations driven by renewals with lower in period revenue recognition from the mix of contracts. The year over year decline is reflective of the continued customer shift to cloud offerings. Enterprise and Partner Services revenue increased 56% in constant currency slightly ahead of expectations due to better than expected performance in Enterprise Support Services. Segment gross margin dollars increased 1314% in constant currency and gross margin percentage decreased four points year over year driven by scaling our AI infrastructure. Operating expenses increased 67% in constant currency and operating income grew 1718% in constant currency.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Now to more personal computing. Revenue was $13,400,000,000 and grew six percent and seven percent in constant currency ahead of expectations due to better than expected results across all businesses. Windows OEM and devices revenue increased 3% year over year ahead of expectations as tariff uncertainty through the quarter resulted in inventory levels that remained elevated. Search and news advertising revenue ex TAC increased 2123% in constant currency. Results were significantly ahead of expectations driven by usage from a third party partnership, better than expected rate expansion and volume growth across Edge and Bing.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And in gaming, revenue increased 56% in constant currency. Xbox content and services revenue increased 89% in constant currency ahead of expectations driven by stronger than expected performance in third party and first party content. Segment gross margin dollars increased 911% in constant currency. Gross margin percentage increased two points year over year driven by strong execution on margin improvement in Search and Gaming. Operating expenses increased 1%.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Operating income increased 2123% in constant currency driven by continued prioritization of higher margin opportunities. Now back to total company results. Capital expenditures including finance leases were $21,400,000,000 slightly lower than expected due to normal variability from the timing of delivery of data center leases. Cash paid for PP and E was $16,700,000,000 roughly half of our cloud and AI related spend was on long lived assets that will support monetization over the next fifteen years and beyond. The remaining cloud and AI spend was primarily for servers both CPUs and GPUs to serve customers based on demand signals including our customer contracted backlog of $315,000,000,000 Cash flow from operations was $37,000,000,000 up 16% driven by strong cloud billings and collections partially offset by higher tax payments.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And this quarter free cash flow was $20,300,000,000 Other income and expense was negative $623,000,000 more favorable than anticipated primarily due to net gains on derivatives and investments. Our losses on investments accounted for under the equity method were slightly higher than expected. Our effective tax rate was approximately 18%. And finally, we returned $9,700,000,000 to shareholders through dividends and share repurchases, an increase of 15% year over year. Now moving to our Q4 outlook, which unless specifically noted otherwise is on a U.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

S. Dollar basis. First, through April demand signals across our commercial businesses as well as in LinkedIn, gaming and search have remained consistent. Our outlook assumes those trends continue in Q4. If the environment changes, our results may be impacted.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

In our Windows OEM business, our outlook assumes the elevated inventory levels from Q3 will come down in Q4. We have widened our guidance range in our More Personal Computing segment to account for some of this variability. Next, FX. With the weakening of the U. S.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Dollar in April, we now expect FX to increase total revenue growth by one point. Within the segments, we expect FX to increase revenue growth by one point in Productivity and Business Processes and less than one point in Intelligent Cloud and More Personal Computing. We expect FX to increase COGS operating expense growth by less than one point. In Commercial Bookings, we expect solid growth on a significant prior year comparable and a growing ex pre base. Bookings growth will be driven by strong execution across our core annuity sales motions and continued long term commitments to our platform.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

As a reminder, larger longer term Azure contracts which are more unpredictable in their timing can drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should be roughly 67% down year over year primarily driven by the impact of scaling our AI infrastructure. And now capital expenditures. We expect Q4 capital expenditures to increase on a sequential basis. H2 CapEx in total remains unchanged from our January guidance.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

As a reminder, there can be quarterly spend variability from cloud infrastructure build outs and the timing of delivery of finance leases. Next to segment guidance. In Productivity and Business Processes, we expect revenue of US32.05 billion dollars to US32.35 billion dollars or growth of 11% to 12% in constant currency. M365 Commercial Cloud revenue growth should be approximately 14% in constant currency relatively stable compared to the prior quarter. We expect continued ARPU growth through E5 and M365 Copilot and some seat growth moderation given the size of the installed base.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

M365 Commercial Products revenue growth should be in the mid single digits. As a reminder, M365 Commercial Products includes both the Windows commercial on premises components of M365 suites and Office transactional purchasing both of which can be variable due to end period revenue recognition dynamics. M365 Consumer Cloud revenue growth should be in the mid teens driven by the January price increase. For LinkedIn, we expect revenue growth in the high single digits. And in Dynamics three sixty five, we expect revenue growth to be in the mid to high teens with continued growth across all workloads.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

For Intelligent Cloud, we expect revenue of $28,750,000,000 to $29,050,000,000 or growth of 20 to 22% in constant currency. Revenue will continue to be driven by Azure which as a reminder can have quarterly variability primarily from in period revenue recognition depending on the mix of contracts. In Azure, we expect Q4 revenue growth to be between 3435% in constant currency driven by strong demand for our portfolio of services. In our non AI services, we expect focused execution to continue driving healthy growth. And in our AI services, while we continue to bring data center capacity online as planned, demand is growing a bit faster.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Therefore, we now expect to have some AI capacity constraints beyond June. In our on premises server business, we again expect revenue to decline in the mid single digits with the ongoing customer shift to cloud offerings. And the Enterprise and Partner Services, we expect revenue growth to be in the mid to high single digits driven by Enterprise Support Services. In More Personal Computing, we expect revenue to be $12,350,000,000 to $12,850,000,000 Windows OEM and devices revenue should decline in the mid to high single digits. We expect Windows OEM revenue to decline in the low to mid single digits assuming OEM inventory levels come down through the quarter as noted earlier.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Although the range of potential outcomes is wider than normal. Devices revenue should decline in the high teens. Search and news advertising ex TAC revenue growth should be in the high teens even on a strong prior year comparable. We expect to see continued growth in both volume and revenue per search with share gains across Edge and Bing. Overall search and news advertising revenue growth should be in the mid teens.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And in gaming, we expect revenue growth to be in the mid single digits. We expect Xbox content and services revenue growth to be in the high single digits driven by first party content. Now back to company guidance. We expect COGS of 23,600,000,000.0 to $23,800,000,000 or growth of 19% to 20% in constant currency and operating expense of $18,000,000,000 to $18,100,000,000 or growth of approximately 5% in constant currency. Therefore, even with ongoing AI investments as we scale, we continue to expect full year FY 2025 operating margins expected to be roughly negative $1,200,000,000 primarily driven by investments accounted for under the equity method.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

As a reminder, we do not recognize mark to market gains or losses on equity method investments. And lastly, we expect our Q4 effective tax rate to be approximately 19%. Now I'd like to share some closing thoughts as we look to the next fiscal year. We remain committed to investing against the strong demand signals we see for our services. So as a reminder, our earlier comments on FY 2026 capital expenditures remain unchanged.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

We expect CapEx to grow. It will grow at a lower rate than FY 2025 and will include a greater mix of short lived assets, which are more directly correlated to revenue than long lived assets. These investments along with focused execution that delivers near term value to our customers will ensure we continue to lead through the cloud and AI opportunity ahead. With that, let's go to Q and A, Jonathan.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Amy. We'll now move over to Q and A. Out of respect to others on the call, we request that participants please only ask Operator, can you please repeat your instructions?

Operator

And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Excellent. Thank you guys for taking the question and congratulations on a fantastic quarter. In what all of us are looking at as a difficult environment, a lot of uncertainty out there, so really impressive to put up the results that you guys did. One of the things that we heard a lot about this quarter in the media and press reports was changing data center commitments, maybe Microsoft walking away from some of those data center commitments. But it sounds like the AI demand is very strong.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

You're talking about not being able to hit all that demand with supply. So could you talk to us about what's going on with your data center strategy? Are there any shifts taking place? And maybe in particular, Satya, you could talk about some of the comments that you had made about the potential risk for oversupply in GPUs out in the future. What exactly was that risk you were talking about?

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

And are you incorporating that risk into your data center strategy?

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. First of all, thanks, Keith, for the question. The reality is we've always been making adjustments to build, lease, what pace we build all through the last whatever, ten, fifteen years. It's just that you all pay a lot more attention to what we do quarter over quarter nowadays. Having said that, the key thing for us is to have our build and lease be positioned for what is the workload growth of the future.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Right? So that's what you have to go and seek to. So there's a demand part to it. There is the shape of the workload part to it and there is a location part So you don't want to be upside down on having one big data center in one region when you have a global demand footprint.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

You don't want to be upside down when the shape of demand changes because after all with essentially pre training plus test time compute, that's a big change in terms of how you think about even what is training, right, forget inferencing. So fundamentally given all of that and then every time that there's great Moore's Law, but remember this is a compounding sort of S curve, right, which is Moore's Law, there's system software, there's model architecture changes, there's the app server efficiency. Given all of that, we just want to make sure we're building accounting for the latest and greatest sort of information we have on all of that. And that's what you see reflected. And I feel very, very good about the pace.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

In fact, Amy just mentioned, we will be short power. And so therefore but it's not power it's not a blanket statement. I need power in specific places so that we can either lease or build at the pace at which we want. And so that's the sort of plan that we're executing to. Maybe Amy, you can add to that.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Yes. Maybe just to add a little bit to Satya's comments. Just a reminder, these are very long lead time decisions from land to build to build outs can be lead times of five to seven years, two to three years. So we're constantly in a balancing position as we watch demand curves and many of the things Satya watched. And the second part is just to maybe remind you when Satya talks about being short power, he's really talking about data center space.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And so we've continued through the second half to put things in place. In fact, we talked a little bit about pulling even some of that space to be ready earlier and being able to deliver that earlier to customers this quarter, which is really good work by the teams as we continue to get more and more efficient at that process. And I look forward to being able to continue to do that in the future. I did talk about in my comments, we had hoped to be in balance by the end of Q4. We did see some increased demand, as you saw through the quarter.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

So, we are going to be a little short, still stay a little tight as we exit the year, but are encouraged by that.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Excellent. Thank you, guys.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Keith. Operator, next question please.

Operator

The next question comes from the line of Brent Thill with Jefferies. Please proceed.

Brent Thill
Brent Thill
Tech Sector Leader, Software/Internet Research at Jefferies Financial Group

Thanks. Satya, on your comment about accelerating demand for cloud migrations, I'm curious if you could dig in and extrapolate a little more what you're seeing there? Thank you.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Thanks, Brent. So yes, so I sort of think about three big things that are happening in the cloud all in parallel and there's also a relationship between them. One is, I'll just say the classic migration of whether it's SQL, Windows Server. And so that sort of again got good steady state progress because the reality is, I think everyone's now perhaps there's another sort of kick in the data center migrations just because of the efficiency, the cloud provides. So that's sort of one part.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

The second piece is good data growth. You saw some like Postgres on Azure. I mean, forgetting even SQL Server, Postgres on Azure is growing, Cosmos is growing. The analytics stuff I talked about with Fabric. It's even the others, whether it is Databricks or even Snowflake on Azure are growing.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

So we feel very good about Fabric, growth and our data growth. Then the cloud native growth. So this is again before we even get to AI, some of the core compute consumption of cloud native players is also pretty very healthy. It was healthy throughout the quarter. We projected to go moving forward as well.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Then the thing to notice is the ratio and I think we mentioned this multiple times before. If you look underneath even chat GPT, in fact that team does a fantastic job of thinking about not only their growth in terms of AI accelerators they need, they use Cosmos DB, they use Postgres, they use core compute and storage. And so there's even a ratio between any AI workload in terms of AI accelerator to others. So those are the four pockets, I'd say, or four different trend lines which all have a relationship with each other. And if I step back, and Amy and I talk a lot about this, this time around there's nothing certain for sure in the future except for one thing, which is our largest business is our infrastructure business.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And the good news here is the next big platform shift builds on that. So it's not a complete rebuild. Having gone through some of these platform shifts where you have to come out on the other side with a full rebuild. If there is good news here and is that we have a good business in Azure that continues to grow and the new platform depends on that. So we want to stay disciplined and execute super well on that.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thank you. Thanks, Brent. Operator, next question please.

Operator

The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed.

Mark Moerdler
Managing Director, SVP and Senior Research Analyst at Sanford C. Bernstein Limited

Thank you very much for taking my question and I will reiterate what my peers have said. Congratulations on the great quarter. Satya and Amy, Microsoft is a very different business than it was during the last recession. Incredible job you've done. If we get into a recession, I hope we don't, how do you think about the stability, the sustainability, revenue volatility of Microsoft today if we were to get into recession?

Mark Moerdler
Managing Director, SVP and Senior Research Analyst at Sanford C. Bernstein Limited

Would the business react early to recession or late? Would a recession have a more shallow impact on revenue? Any thoughts would

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

be appreciated. Maybe I'll start and then Amy should add, Mark. The way at least I think we will approach it is quite frankly be very focused on how we help our customers. If there is any turbulence in the macro. Because one of the things that we feel we can't do just because of the efficiencies of the cloud And the footprint we have and the differentiated sort of layers of the stack from the SaaS application side to the infrastructure side.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

I think if you sort of buy into the argument that software is the most malleable resource we have to fight any type of inflationary pressure or any type of growth pressure where you need to do more with less, I think we can be super helpful in that. And so if anything, we would probably have more of that mindset is how do we make sure we are helping our customers. And then of course, we'll look to share gains.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Mark. Operator, next question please.

Operator

The next question comes from the line of Karl Keirstead with UBS. Please proceed.

Karl Keirstead
Karl Keirstead
Managing Director - Software Equity Research at UBS Group

Okay. Thanks. A number of metrics to applaud, but I think the one that stands out to me is the 16 growth rate lift to Azure from AI. Sachin, Amy, I just wanted to ask if you could unpack that a little bit. Of course, you mentioned that you got a bit of a kicker from capacity coming online. But I'm a little bit more interested in where the demand came in above expectations, like what workload type. It's hard for us to see that on the outside. Was it a surge in ChatGPT inference that landed in Azure?

Karl Keirstead
Karl Keirstead
Managing Director - Software Equity Research at UBS Group

Was it an uptick in enterprise AI adoption? And Amy, do you think that 16 points could be higher in June? Thank you.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Thanks, Carl, for the question. Just to provide some clarity, because I think your question implies something that we didn't mean to imply on the call. First, the real outperformance in Azure this quarter was in our non AI business. So then to talk about the AI business, really what was better was precisely what we said. We talked about this.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

We knew Q3 that we had really matched supply and demand pretty carefully and so didn't expect to do much better than we had guided to on the AI side. We've been quite consistent on that. So the only real upside we saw on the AI side of the business was that we were able to deliver supply early to a number of customers. And being able to do that throughout the quarter creates quite a good benefit to us. But the majority of our outperformance versus where we had expected to be was on the non AI piece of the business.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Karl. Operator, next question please.

Operator

The next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Hi, thank you very much. One question for Amy. You've said in the past that you can attain better and better capital efficiency with the cloud business and probably cloud and AI business. Where do you stand today, Amy? Maybe, Satya, you can opine as well, that you've said before that you can slow down your CapEx growth rate while still accelerate Azure, which includes AI.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Can we get a mark to market on that? Thank you so much.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Maybe I'll I'll start, Kash, and let Satya add on. Because I really think when you go back and read some of Satya's comments on how the s curves build on themselves, that's actually the levers that go into the answer of the question that you're asking. And so the way, of course, you've seen that historically is, right, when we went through the prior cloud transitions, you see CapEx accelerate, you build out data center footprints, you slowly fill CPU capacity. And over time, you see software efficiencies and hardware efficiencies build on themselves. And you saw that process for us for, goodness, now quite a long time.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And what Tatya is talking about is how quickly that's happening on the AI side of the business and you add to that model diversity. So think about the same levers plus model efficiency, those compound. Now the one thing that's a little different this time is just the pace. And so when you're seeing that happen, pace in terms of efficiency side, but also pace in terms of the build out, So it can mask some of the progress, but we are working hard across all of the teams, hardware, software, even the build teams to get things in place as quickly as possible, dock to live times. All of that is improving and all of that actually is benefiting us.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And I'll go ahead and say, our margins on the AI side of the business are better than they were at this point by far than when we went through the same transition and the server to cloud transition.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yes. I mean, I think at a macro level, think the way to think about this is you can ask the question, what's the difference between a hosting business and a hyperscale business? It's software. That's I think the gist of it. We asked for sure it's a capital intensive business, but capital efficiency comes from that system wide software optimization.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

And that's what makes the hyperscale business attractive and that's what we want to just keep executing super well on.

Kash Rangan
Kash Rangan
Managing Director at Goldman Sachs

Super. Thanks so much.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Operator, next question please.

Operator

The next question comes from the line of Mark Murphy with JPMorgan. Please proceed.

Mark Murphy
Mark Murphy
MD - Software Research at JP Morgan

Thank you so much. Satya, you had commented recently that the DeepSeek moment is a real thing. And you had said that software efficiencies mean that the fleet will be aged for a longer time. Can you comment on how those advances are affecting the pace and volume of AI experimentation and activity in the marketplace? And Amy, could we start to consider the possibility that software enhancements might extend the useful life assumption that you're using for GPUs?

Mark Murphy
Mark Murphy
MD - Software Research at JP Morgan

Or is it a little premature to be thinking that way?

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Yeah. First of all, I think some of the work that actually OpenAI first pioneered and did with all of the reasoning models and of course DeepSeek has sort of added to it and done good work as well and others as well. The idea that you can have test time compute plus pre training and then some of the great optimization at inference time that has all happened has proven out. I mean if you look at it, I would say for every Moore's law change and movement, there's probably a 10x improvement because of software, right? That's sort of what's happening with these models.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Some of it comes from model architecture, some of that comes from data efficiency, compute efficiency and what have you. So that's what we are riding and we feel that all up when you have a commodity that is getting that better then the question is how do you build out a fleet that's super balanced so that then the workloads can be built and can in fact take advantage of that efficiency at the underlying infrastructure. I mean it's kind of like virtualization. What is the difference between servers and sort of again client server with virtualization? It was efficiency.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

What is the difference between virtualization and cloud? It was efficiency. What is the difference between this generation of cloud and AI? It's efficiency. So the more you can kind of continue to think about software driving that efficiency is what drives demand ultimately.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And to your specific question, in terms of thinking about the depreciable life of an asset, we like to have a long history before we make any of those. We're focused on getting every bit of useful life we can, of course, out of assets. But to Tatya's point, that tends to be a software question more than a hardware one.

Mark Murphy
Mark Murphy
MD - Software Research at JP Morgan

Thank you.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Mark. Operator, next question please.

Operator

The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed.

Kirk Materne
Senior Managing Director, Equity Research at Evercore ISI

Yes, thanks very much and congrats on a great quarter. Amy, you mentioned that the upside in Azure came from the non AI services this time around. I was wondering if you could just talk a little bit more about that. And I guess as you look forward, maybe what's different this go round versus what we saw a few years ago when obviously things like optimization weighed on the growth a little bit? It sounds like the product portfolio is much broader right now.

Kirk Materne
Senior Managing Director, Equity Research at Evercore ISI

But just wondering if you could add some color on that front. Thank you.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Sure. And thanks for the question, Kirk. When we go to non AI, I talked a little bit about this. In general, we saw better than expected performance across our segments, but we saw acceleration in our largest customers. We call that the enterprise segment in general.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And then in what we talked about of our scale motions where we had some challenges in Q2, things were a little better. And we still have some work to do in our scale motions, and we're encouraged by our progress. We're excited to stay focused on that as, of course, we work through the final quarter of our fiscal year. By geo, the performance was pretty consistent. Satya actually highlighted some of the workloads that came in a little better than we thought.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Obviously, just some good consistent work on migrations, good execution by the sales and partner teams, the data workloads he went through. And so in general, Kirk, I wouldn't say it's anything beyond that. I do think it was improved execution, And I was happy to see it, but there's still some work to do on our scale motions in particular.

Kirk Materne
Senior Managing Director, Equity Research at Evercore ISI

Thank you.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Kirk. Operator, we have time for one last question.

Operator

The last question will come from the line of Alex Zukin with Wolfe Research. Please proceed.

Alex Zukin
Analyst at Wolfe Research LLC

Hey, guys. Thanks for squeezing me in. And again, just amazing congratulations on those Azure numbers, which I think are quite honestly just inspiring. So so maybe to Amy, to to the point that you're making that the surprise factor was on the non Azure, non AI side of the house. And and it sounds like that there's confidence in that continuing, beyond.

Alex Zukin
Analyst at Wolfe Research LLC

How much of that are you starting to see the pull pull in of the non AI driven by the AI portion of Azure? And on the AI portion specifically, as test time compute really just blows out kind of prior conceptions of scaling law challenges, how much does that change potentially the curve of the AI Azure growth as you go forward here over the next few quarters?

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Hi, Doc. Let me, first of all, say I think we've talked about this quite a bit. It's always good to have a chance to to iterate this. It's getting harder and harder to separate what an AI workload is from a non AI workload. And we've talked about it this way, I think, in most instances, to make sure people understood that when we were accelerating all of our CapEx spend over the past two point five three years now, that people had confidence that we were turning that into revenue and product in a way that was transparent and that everyone could understand really the goals that we had set for ourselves and for our partners and customers in terms of building product that turned to Revit. But if you take a step back from that, it's that these workloads are being built, GPU, CPU, storage, network, all the same things. And so I think, really, what we're talking about is really how Satya talked about in one of the earlier questions. You know, we're seeing digital natives. Digital natives build workloads. They do AI work.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

They do non AI work. Do they tend to do that work in the same cloud? Lots of times. Sometimes, it's all in the same place. Not all the time, but that relationship gets stronger and stronger as people pivot to more of AI heavy workloads.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

And so I think you're starting to see some of that relationship. I think we'll continue to see that as AI workloads continue to get built and experimented with and proof of concepts get expanded. And so I think I mostly focus on the fact that together we saw good performance in Q3 on Azure. Azure inclusive of both components in terms of our execution, in terms of the field and partner teams and backlog and conversion and interesting workloads and adding customer value and solving real problems and adding real value. And I think that's probably how I would approach that number more than trying to separate it in the way that even we have talked about it, but for very different reasons.

Jonathan Neilson
Jonathan Neilson
VP of IR at Microsoft

Thanks, Alex. That wraps up the Q and A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon.

Satya Nadella
Satya Nadella
Chairman & CEO at Microsoft

Thank you.

Amy Hood
Amy Hood
Executive VP & CFO at Microsoft

Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.

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