Microsoft is set to deliver an annual revenue run rate of $10 billion next quarter for its artificial intelligence (AI) business.

Satya Nadella, Microsoft's CEO, revealed the news on the company's Q1 2025 earnings call, held on October 30. It will mean the AI unit has reached the $10bn revenue milestone faster than any other division in the company's history.

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– Sebastian Moss

Importantly, that growth is being generated by inference workloads, not training, Nadella said.

"It's all inference," he said. "One of the things that may not be as evident is that we're not actually selling raw GPUs for other people to train."

The CEO added that the company is turning away requests to use their GPUs for training "because we have so much demand on inference."

There are still "a bunch of tech companies still using VC money to buy a bunch of GPUs," Nadella said. But he explained: "We are not even participating in most of that because we are literally going to the real demand, which is in the enterprise space or our own products like GitHub Copilot or Microsoft 365 Copilot."

Microsoft as a whole posted quarterly revenue of $65.6 billion and net income of $24.7 billion, improvements of 16 and 11 percent respectively.

Microsoft Cloud's revenue for the quarter surpassed $38.9 billion which is up 22 percent. CFO Amy Hood noted that the growth in long-term commitments to the Microsoft Cloud platform has driven this, with commercial books ahead of expectations and increased by 30 percent (23 percent in constant currency).

"Results were driven by strong execution across our core annuity sales motions and growth in the number of $10 million-plus contracts for both Azure and Microsoft 365," Hood said. "Additionally, we also saw an increase in the number of $100-million-plus contracts for Azure."

In terms of gross margin, Microsoft Cloud had a percentage decrease of two percent to 71 percent, though Hood noted this was slightly better than expected due to "improvement in Azure." The decrease is driven by investment in AI infrastructure.

Microsoft's Azure and other cloud services revenue grew 33 percent (34 percent in constant currency). Azure growth included roughly 12 points from AI services which is similar to Q4 of 2024. Hood noted that "demand continues to be higher than our available capacity."

Capex, predictably, remains high. The quarter, including finance leases, Microsoft spent $20 billion on capex. This compares $14 billion on Q1 2024, which itself was an 80 percent increase year-on-year. "Roughly half of our cloud and AI-related spend continues to be for long-lived assets that will support monetization over the next 15 years and beyond. The remaining cloud and AI spend is primarily for servers, both CPUs and GPUs, to serve customers based on demand signals," said Hood.

This high capex also saw a reduction in Microsoft's free cash flow - down seven percent year-over-year to $19.3bn.

The company expects capex to continue to grow, with Hood noting that this will occur on a "sequential basis given our cloud and AI demand signals."

Q2 2025 is expected to see revenue growth in Azure of around 31 to 32 percent, lower than Q1. This has been put down to "capacity constraints" related to power, data center space, and GPUs, which the company hopes will ease by the second half of the year.

According to Nadella, Microsoft now has data centers in more than 60 regions around the world. This quarter, the company has overseen AI infrastructure investments in Brazil, Italy, Mexico, and Sweden to help expand its capacity.

Microsoft is currently in negotiations with OpenAI regarding its stake in the company as OpenAI transitions from a non-profit to a for-profit corporation. Nadella touched on the partnership with OpenAI during the earnings call, noting that Microsoft has an "economic interest in a company that has grown significantly in value, and we have built differentiated IP and are driving revenue momentum" and that the company has added support this quarter for OpenAI's newest model family.

The financial earnings have been shared just days after Microsoft accused Google of launching "shadow campaigns" against it, aiming to "discredit Microsoft with competition authorities, and policymakers and mislead the public."

Google's parent company Alphabet released its earnings for the quarter on October 29, with cloud revenues of $11.4bn with an operating margin of 17 percent.