Following last week’s DeepSeek industry shattering announcement, many in the AI realm may be experiencing a bit of large language model- related ADHD. Recently, Microsoft CFO Amy Hood sent an internal memo to employees, urging them to keep their heads down and focus amidst the buzz surrounding AI news, particularly the rise of DeepSeek.
Amy Hood’s memo came at a crucial time, following Microsoft’s second-quarter earnings report. Despite the company’s impressive financial performance, with a 12% revenue growth to $69.6 billion and a 21% increase in Microsoft Cloud revenue, the market’s reaction was mixed due to slower-than-expected growth in AI and cloud computing services. According to the memo first reported on by Business Insider, Africa, Hood emphasized the importance of delivering real-world AI solutions and scaling the company’s cloud and AI infrastructure to support partners and customers.
One of the significant distractions mentioned in Hood’s memo was the recent news about DeepSeek, a Chinese AI startup that has developed a cost-efficient AI model. DeepSeek’s model has raised questions about the substantial investments being made in AI infrastructure and whether they will yield the expected returns. Despite the noise, Hood urged Microsoft employees to remain steadfast in their priorities: security, quality, and AI innovation.
Hood’s memo serves as a reminder that while it’s essential to stay informed about industry developments, it’s equally important not to get distracted by them. Microsoft’s recently stated mission is to deliver cutting-edge AI solutions that drive real value for customers and Hood believes by focusing on this mission, the company can continue to innovate and lead in the AI space.
In her memo, Hood thanked employees for their focus and hard work, acknowledging the challenges they face in a rapidly evolving industry. She encouraged them to align their efforts with the company’s priorities and commitments, ensuring that Microsoft remains a trusted partner for its customers.
Amy Hood’s memo is a powerful reminder of the importance of staying focused on the mission, even amidst the noise of industry developments. By keeping their heads down and concentrating on delivering real-world AI solutions, Microsoft employees can continue to drive innovation and support the company’s growth. As Hood aptly put it, “Thank you for your focus as we work together for our customers who rely on us.”
Now, let’s address the elephant in the room. Microsoft has been forced to acknowledge that DeepSeek has posed two potentially damaging weak points to the company’s AI efforts going forward. First, there’s the claim of cheaper development. DeepSeek’s AI model, developed at a fraction of the cost of Microsoft’s AI models, has raised eyebrows and questions about the efficiency of Microsoft’s substantial investments in AI infrastructure. Second, there’s the open-source access. DeepSeek’s decision to make its AI model open-source has democratized access to advanced AI capabilities, potentially undermining Microsoft’s competitive edge.
Despite Hood’s ra-ra memo, there is stormy weather ahead for Microsoft and its AI developers. Navigating a new open-sourced threat they don’t control will be no small feat. The rise of DeepSeek has introduced a level of unpredictability and competition that Microsoft must contend with. As the company strives to maintain its leadership in the AI space, it will need to adapt and innovate in response to these emerging challenges.
Team,This afternoon, we announced our second-quarter financial results. We grew revenue by 12% to $69.6 billion, operating income by 17% to $31.7 billion, and earnings per share by 10% to $3.23. Our results exceeded our Q2 outlook given to Wall Street.Our Microsoft Cloud revenue was $40.9 billion, up 21% year-over-year. Our results reflect strong customer demand as we continue to create cutting-edge capabilities that are driving real value and measurable impact for our customers. This quarter, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year. Highlights from our commercial business, which grew 17%, are below:Commercial bookings were significantly ahead of expectations and increased 67% and 75% in constant currency. The outperformance was primarily driven by Azure commitments from our partner, OpenAI, and strong execution across our core annuity sales motions.
Amy Hood – Microsoft CFO
Azure and other cloud services revenue grew 31%, landing at the lower end of our expectations. This includes 13 points of growth from AI services, which exceeded expectations. Growth in non-AI services came in slightly below our expectations, influenced by some near-term execution challenges.Microsoft 365 commercial cloud revenue grew 16%, slightly ahead of expectations, driven by our E5 suite and M365 Copilot. M365 Copilot has seen growth in adoption, expansion, and usage.
Dynamics 365 revenue grew 19% driven by growth across all workloads.We invested $22.6 billion in capital expenditures as we invest against both short- and long-term demand signals for our Microsoft Cloud inclusive of AI workloads.In our consumer business, revenue grew 2%, which was better than expected. As we work to accelerate growth in our consumer business, we remain focused on delivering consumer experiences that delight and earn user loyalty. Below are key points from our consumer businesses:Search and news advertising ex TAC revenue grew 21%, above expectations, with rate expansion and continued volume growth from Edge and Bing.Windows OEM and devices revenue grew 4%, ahead of our expectations, driven by commercial PC inventory builds in advance of Windows 10 EOS as well as uncertainty around tariffs.
Gaming revenue decreased 7%, primarily driven by hardware. Xbox Content and services revenue increased 2%, ahead of expectations, driven by better performance in Blizzard and Activision content, including Call of Duty.LinkedIn revenue grew 9%, reflecting growth across all lines of business. However, ongoing weakness in the hiring market in key verticals negatively impacted growth in the Talent Solutions business.As a reminder, our stock trades not only on our results, but on our outlook for the next quarter and beyond. Investors listen to our earnings call to gain deeper insights into these indicators, and I would encourage you to listen too, as it offers useful context to help align our efforts in driving toward our priorities and commitments. You can join the call live today at 2:30PM Pacific Time, listen on-demand, or read the transcript on the Investor Relations Website.There has been a lot of AI-related news this week, but our focus is clear: delivering real-world AI solutions while simultaneously globally scaling our cloud and AI infrastructure to support our partners and customers as they adopt, build, and grow as well. As a company, we remain steadfast in the priorities which are required to deliver on that product promise — security, quality, and AI innovation. Thank you for your focus as we work together for our customers who rely on us.With appreciation and gratitude, Amy
