Microsoft’s Balancing Act: AI Spending, a Restructured OpenAI Pact, and a Historic Severance Offer

Microsoft reports Q3 earnings with Azure growth as the key metric, alongside a first-ever voluntary severance program and a renegotiated OpenAI deal amid massive AI capex.

When Microsoft reports earnings after the closing bell today, the market will be parsing far more than just the headline numbers. The tech giant enters the print with a trio of unusual developments: its first-ever voluntary severance program for US staff, a freshly renegotiated OpenAI deal, and an Azure growth target that has analysts setting a high bar. The stakes are elevated, with the stock already down roughly 10% year-to-date and trading about 22% below its 52-week high.

Wall Street is looking for earnings per share of $4.06 on revenue of $81.3 billion, a sharp jump from the $3.46 and $70.1 billion reported in the same quarter last year. Microsoft’s own guidance called for revenue in a range of $80.65 billion to $81.75 billion. But as recent quarters have shown, beating expectations is no longer enough—the market is laser-focused on what comes next.

Azure Growth: The Make-or-Break Metric

The single most watched number tonight will be Azure’s growth rate. Microsoft has guided for 37% to 38% growth in constant currency, a slight deceleration from the 38% posted last quarter. Evercore analyst Kirk Materne put it bluntly: only if Azure lands at the upper end of that range—or above it—will the stock see real momentum. Anything less amounts to damage control.

Morgan Stanley has set the bar even higher, pegging 39% as the threshold that would truly move the needle. The nuance here is that Azure’s growth is currently supply-constrained rather than demand-constrained—more capacity translates directly into more revenue. CFO Amy Hood hinted at this dynamic on the last earnings call, noting that if Microsoft had allocated all newly deployed GPUs exclusively to Azure, growth would have exceeded 40%. Instead, the company split capacity among Azure, Copilot, and GitHub.

A signal of expanding capacity came on April 16, when CEO Satya Nadella announced that Microsoft’s Fairwater data center in Wisconsin had gone live ahead of schedule. The campus is part of a more than $7 billion investment program in the state and links hundreds of thousands of GB200 chips into a single cluster.

The Severance Program: A First for Microsoft

In a move unprecedented in its 51-year history, Microsoft is offering voluntary severance to roughly 8,500 US employees—about 7% of its American workforce. Eligibility is limited to employees through the senior director level, provided their age plus years of service total at least 70. Those on sales incentive plans are excluded.

Microsoft has not disclosed the full financial terms, but confirmed that health insurance is included and that participants face no non-compete restrictions. Eligible employees will receive details on May 7.

The rationale is clear: Microsoft is planning capital expenditures of $110 billion to $120 billion for the current fiscal year, up from roughly $80 billion last year. That massive outlay for AI data centers is forcing the company to tighten its belt elsewhere.

The OpenAI Restructuring: Margin Relief with a Trade-Off

Just two days before earnings, Microsoft and OpenAI fundamentally restructured their partnership. The license on OpenAI’s intellectual property now runs through 2032—but is no longer exclusive. Microsoft will no longer pay OpenAI a revenue share for Copilot products, while OpenAI’s share of Microsoft’s revenue continues through 2030, subject to an agreed-upon cap.

The immediate impact is a boost to Copilot’s operating gross margin, since the revenue outflow to OpenAI is gone. The trade-off: OpenAI can now license its models to Amazon’s cloud services or other competitors.

This comes as Microsoft 365 Copilot has crossed 15 million paid users—impressive on its face, but representing only about 3.3% of the commercial M365 base of 450 million seats. Every update to that penetration rate will move the stock. At 5% adoption, that would translate to roughly 22.5 million seats and approximately $8.1 billion in annualized incremental revenue.

Capital Expenditures and the Cash Flow Squeeze

The investment appetite is the second major theme. Capital expenditures are on track to hit roughly $104 billion for the current fiscal year, up from $64.6 billion last year. The free cash flow margin has consequently contracted from 25.4% to an estimated 21.5%.

In the second fiscal quarter alone, Microsoft spent $37.5 billion on AI infrastructure. The question investors are asking tonight: when does this spending start translating into revenue? The company’s contracted backlog has more than doubled to $625 billion, with roughly 45% attributable to OpenAI. William Blair analyst Jason Ader noted that excluding OpenAI, the backlog still grew 28%, and new contract signings surged 228%.

The Mega-Cap Comparison Game

Microsoft isn’t reporting in a vacuum. Amazon, Google, and Meta all release their numbers on the same afternoon, setting up a real-time comparison of Azure, AWS, and Google Cloud. Any relative weakness in Azure will hit the stock immediately.

The options market is pricing in a 7% move in either direction. Of the 34 analysts tracked by TipRanks, 32 rate the stock a buy, with an average price target of roughly $570—implying upside of more than 34%. Whether that potential moves closer tonight depends on three numbers: Azure growth, cloud gross margin, and the trajectory of capital expenditures for the rest of the year.