Microsoft’s AI and cloud services drive strong financial growth, but its gaming division faces challenges. In its Q2 2025 earnings report, the company announced revenue of US$69.6 billion, marking a 12% year-over-year increase, while net income grew 10% to US$24.1 billion.
AI and cloud services lead to growth
CEO Satya Nadella highlighted the rapid expansion of Microsoft’s AI business, which has now surpassed an annual revenue run rate of US$13 billion, reflecting 175% year-over-year growth. Azure and other cloud services saw a 31% year-over-year increase, slightly lower than the 33% reported in the previous quarter.
Xbox sales decline amid changing strategy
Microsoft’s gaming division struggled, with overall gaming revenue falling 7% and Xbox hardware sales dropping 29%. The company’s shift from focusing solely on hardware—evident in its “This is an Xbox” campaign and the expansion of Xbox Game Studios titles to other platforms—may have contributed to this decline.
Despite hardware struggles, Xbox’s content and services revenue grew by 2%, driven by increased Game Pass subscriptions. Nadella revealed that Game Pass set a new quarterly revenue record, and Xbox Cloud Gaming reached 140 million hours streamed. The newly launched game Indiana Jones and the Great Circle has already attracted over 4 million players.
Mixed outlook for Windows and gaming
Microsoft’s Windows OEM and devices revenue grew by 4% year-over-year, improving from 2% in Q1. However, CFO Amy Hood stated that Windows OEM and device revenue will decline by low to mid-single digits in Q3 2025. Similarly, gaming revenue is projected to grow modestly, with Xbox content and services seeing slight growth while Xbox hardware sales continue declining.
Nadella also reaffirmed Microsoft’s strong relationship with OpenAI despite the company’s recent adjustment to their partnership. He acknowledged DeepSeek’s innovations, indicating Microsoft’s awareness of emerging competition in the AI space.
