After a $357B write-off, the tech giant finds another opportunity – GeekWire

The last time Microsoft reported earnings, it seemed to be doing pretty well, at least by traditional metrics. Revenue rose 17%, profit rose 24%, and the company’s closely watched Azure cloud business beat internal forecasts.

It was completely punished.

Microsoft stock fell 10% the next day, wiping $357 billion off its market value. Investors looked beyond the standard numbers, focusing on the company’s record $37.5 billion in quarterly revenue, the backlog of AI revenue that relied heavily on OpenAI, and the Copilot product that only accounted for 3.3% of Microsoft 365’s commercial base.

The stock has yet to recover, ending last week down 22% from its 52-week high.

On Wednesday, Microsoft gets another chance, reporting its Q3 financial results after the market closes. Here’s a preview of the key numbers and storylines to watch.

Main salary scales: Analysts expect Microsoft to report revenue of $81.4 billion, up 16% from last year, and earnings of $4.06 per share, up 17%, according to Yahoo Finance. Microsoft has beaten Wall Street estimates for four consecutive quarters.

Cloud expectations: Microsoft said it expects Azure to grow 37% to 38% on a constant basis (adjusted for exchange rate fluctuations) in Q3. That would be a slight drop from the 38% it posted in Q2. Finally, Azure beat Microsoft’s forecast but fell short of their private expectations, which is a major factor in the stock’s historic decline.

But the Azure number doesn’t tell the full story. CFO Amy Hood said on the last earnings call that if Microsoft had offered all the GPUs it brought online in Q1 and Q2 only to Azure (that is, the company’s cloud customers), the growth rate would have been more than 40%.

Instead, the company split that capacity across Azure and its products and operations, including Copilot, GitHub Copilot, and internal R&D. That said, the growth of Azure is an indication that Microsoft is choosing to allocate its resources as it measures demand.

Simple Microsoft: Even in the past few months, Microsoft has moved to cut costs and streamline its operations as it continues to leverage its AI infrastructure — trying to show Wall Street that it’s managing operating costs.

• The company offered voluntary retirement to thousands of employees for the first time in its 51-year history, targeting employees whose age and total service years are 70 or more. Hood is expected to discuss the plan’s financial details on the earnings call.
• It shed its management layers and overhauled its compensation structure, reducing the number of pay points from nine to five and reducing stock awards to bonuses.
• Clouds and sales teams were used sparingly and boundaries were employed.
• Several executives have announced they will retire, including Experience and Devices chief Rajesh Jha, Developer Division leader Julia Liuson, and Xbox chief Phil Spencer.

Capital expenditure: Microsoft is on pace to spend more than $100 billion on infrastructure in fiscal 2026, up from $88.7 billion a year ago, reflecting an increase in spending across Big Tech. About two-thirds go to GPUs and other computing hardware for AI and cloud workloads.

Hood said capex spending will drop from Q2’s $37.5 billion in the last quarter, but will still be well above the company’s historical levels. Investors will be looking for any signal as to whether the pace of spending is set to continue, slow, or accelerate.

Copilot and AI monetization: Microsoft disclosed in January that its Copilot product had reached 15 million paid seats, about 3.3% of Microsoft 365’s estimated 450 million commercial base, which has been repeatedly cited as an example of the company’s downfall.

At $30 per user per month, Copilot represents a huge revenue opportunity if adoption is rapid, and any new revelations about overall usage will make big headlines. If the company doesn’t disclose this number in a new report, it might as well.

Microsoft’s futures contract revenue doubled to $625 billion last quarter, but about 45% of that was tied to OpenAI, thanks to the company’s renegotiated relationship with the maker of ChatGPT, raising questions about the risk of so much revenue tied to one company.

William Blair analyst Jason Ader noted after last quarter that Microsoft’s futures contract revenue was still up 28% after releasing OpenAI, and that new contract signings were up 228%.

Microsoft CEO Satya Nadella also introduced a new metric last quarter: “tokens per watt per dollar,” a measure of how much AI output the company gets for each unit of power and money it invests. He didn’t give a huge number, but as an example, Nadella said that Microsoft was able to process 50% more OpenAI work with the same amount of infrastructure as before.

Main image: Not everyone is hopeless. Wedbush analyst Dan Ives, in two notes to clients last week, said the market is underestimating cloud growth and that fears about OpenAI and Anthropic ousting the big cloud providers are overblown.

Ives pointed to more than $650 billion in combined AI infrastructure spending from Microsoft, Google, Amazon, and Meta by 2026, and an estimated $3 trillion in business and government AI spending over the next three years. He called the recent sell-off a buying opportunity.

ServiceNow, a major business software company, saw its stock drop 17% in its quarterly results last week, a sign that business technology spending may be slower than expected.

But Intel rose more than 20% on the back of strong profits, driven by a 22% jump in data center and AI revenue, a sign that demand for computing infrastructure behind AI is broadly based.

Avalanche salaries: Amazon, Google, and Meta all report on the same afternoon as Microsoft, meaning investors will be comparing the growth of Azure, AWS, and Google Cloud in real time.

Check back Wednesday afternoon for updates.