Microsoft’s Q3 decisively answered the bear narrative that Azure growth had indefinitely down-shifted. A +35 % constant-currency print—driven more by classical compute, data, and platform services, than by AI, signals sustained cloud momentum. Additionally, a 16-point AI kicker supports the belief that Microsoft has an early lead in GenAI monetization. The operating storyline is now more about supply (i.e. power and GPUs) rather than demand.
Key Cloud & Azure Insights
Powered by Azure momentum, Microsoft’s quarter demonstrates that firms in the so-called Mag 7 can thrive, even in the face of economic uncertainty. As we’ve previously reported, Microsoft does not report revenue figures for Azure. As such, the Azure revenue above is based on our estimates, including revisions based on the leaked court documents during the Activision trial; and Microsoft’s restated Azure definitions from last year. Notably, by our estimates, the Azure & Other Cloud Services category has recently comprised roughly two thirds of Microsoft’s reported Intelligent Cloud segment. With a 35% growth rate in Microsoft’s FY Q3, this suggests Azure now comprises nearly 90% of the segment.
In addition, we find the following points from the quarter relevant:
- Core workloads still set the pace. Microsoft executives indicate that databases, analytics (Fabric, Cosmos DB, PostgreSQL), and everyday “lift-and-shift” migration projects were the largest contributors to the Azure upside. This counters the notion that AI alone is propping up growth.
- AI is scaling—but hitting physical constraints. Microsoft claims that it processed 100 trillion tokens in Q3, yet CFO Amy Hood flagged GPU and power constraints that will persist into Q4. According to the company, power availability, not chips, is now the gating factor in several regions.
- Efficiency gains are meaningful. Management cited a 30% performance lift per watt and >50% lower cost-per-token versus a year ago. As such, once the current capex cycle rolls off, we expect cloud gross margin to rebound toward the 70 %-plus level.
- Backlog provides multi-year runway. A record $315B commercial RPO—up 34 %—suggests that Azure can compound growth in the mid-to-high-20s beyond FY25, even if macro headwinds persist.
- Competitive position is strengthening. With data centers added in 10 new countries and the upcoming Maia/ Cobalt custom silicon stack, Microsoft is widening its geographic and architectural moat, particularly in sovereign cloud and AI inference.
Microsoft continues its spending spree. Capex of $21 B this quarter is eye-popping. If efficiency improvements outstrip workload growth, Microsoft could face under-absorbed asset risk by FY26. For now however, management indicated bookings momentum remains strong which suggests that scenario remains unlikely.
Plus/Minus Summary
Pluses (+)
- Non-AI Azure growth accelerated sequentially—providing evidence of resilient enterprise cloud migration budgets.
- Fabric paid customers shot up 80% YoY to 21,000; OneLake data volume was up 6X—early indication of adoption for Microsoft’s unified data lakehouse strategy.
- Power Platform users reached 56M users (+27 % YoY), reinforcing the low-code strategy around Azure has critical mass.
- Commercial M365 seats surpassed 430M, providing cross-sell leverage for Copilot and Azure back-end services.
Minuses (–)
- Cloud gross margins compressed three points to 69%; management guides another two-point dip in Q4 before stabilizing, indicating the lower margins caused by a higher hardware / infrastructure product mix.
- AI capacity constraints will cap near-term upside; any slip in new power contracts could push the inflection out to FY26.
- On-prem Server revenue fell 6 %, a reminder that legacy declines need to be offset by the continued cloud build-out.
Bottom Line
In our opinion, Microsoft just delivered the clearest demonstration yet that AI demand and traditional cloud adoption are mutually reinforcing. Azure’s re-acceleration to mid-30s growth—accompanied by record backlog and disciplined opex—suggests the business can navigate near-term margin dilution while still expanding operating leverage over the next 12-18 months. The single variable that matters most right now is the availability of energy. This is a common theme we hear from most data center builders.
The momentum in Azure causes us to increase our CY 2025 outlook for Microsoft. Our current view is Azure revenue will surpass $90B this calendar year. If Microsoft executes on its aggressive energy roadmap, we believe Azure can sustain a three-year CAGR north of 25% and rebuild cloud gross margins into the high-60s by FY27, putting the company in an exceedingly strong position for the AI wave.
