# MSFT Full forecast · Q2 FY27

> The forecast for Microsoft: the next two quarters line by line, three years of sales and EPS, a low and a high case. Next report: Q2 FY27 in January 2027. Date not yet set.

Canonical: https://pricedin.markets/msft/fq2-2027/forecast/

cutoff 30 October 2026, 05:24 ET

The forecast for Microsoft: the next two quarters line by line, three years of sales and EPS, a low and a high case. Next report: Q2 FY27 in January 2027. Date not yet set.

[Quarter forecast →](https://pricedin.markets/msft/fq2-2027/preview/)

MSFT · as of 2026-10-30 05:24:01 ET · 6 AI forecasters · 80% ranges, 1 in 10 to 9 in 10

## Sales and earnings outlook

Next quarter · Q2 FY27 $97B +0% above the $96B–$97B outlook

Quarter after · Q3 FY27 $99B +20% on Q3 FY26

This year · FY2027 $396B +19% on FY2026

Next year · FY2028 $462B +17% on FY2027

Year +2 · FY2029 $532B +15% on FY2028

For the second quarter, the models expect Q2-FY2027 sales middle, average: $97.4B, just above the company's range, as Azure demand still outruns supply.

Sales **$97B** +20% on Q2 FY26 ($81B)

*50% range* $96B – $98B *80% range* $95B – $100B

Adjusted EPS **$4.91** +19% on Q2 FY26 ($4.14) Q2 FY26 on the company's earlier definition: “Impact from OpenAI” added since, “Impact from investments in OpenAI” dropped since

*50% range* $4.76 – $5.05 *80% range* $4.60 – $5.21

#### Investment and cash generation

Base case

Capital spending **$44.8B**

Free cash flow **$2.25B**

Free cash flow: operating cash flow less capital spending.

- **Capital spending here is cash paid for property and equipment, Q2-FY2027 base capital spending, average: $44.8B; the company's own figure adds finance leases and is guided higher. About three-quarters buys servers and chips that earn revenue once in service; the rest builds data centers. December is weak for collections, so free cash flow, operating cash flow less that spending, is thin: Q2-FY2027 base free cash flow, average: $2.2B *3 of 6***
  - **Opus 5.5** Cash paid for property and equipment, which is the measure used here, runs about $6 to $7 billion lower.
  - **Opus 5.5** The second quarter is seasonally weak because unearned revenue falls after the June-quarter billings, so its free cash flow is close to zero.
  - **GLM 5.3** I use that same cash basis for my capex and free-cash-flow forecasts
  - **Kimi K3.1 Pro** The capital-spending outlook drives very low near-term free cash flow and continued heavy investment thereafter.

Microsoft opened fiscal 2027 ahead of its own range and of the models' earlier forecast. Q1-FY2027 sales, reported: $92.3B Q1-FY2027 adjusted EPS, reported: $4.89 Q1-FY2027 operating margin, reported: +50% Azure grew even though some third-party capacity arrived late, while Windows sales to PC makers fell.

For the December quarter the company said: Therefore, at a total company level, revenue should be between $96 and $97.1 billion U.S. dollars, or growth of 18 to 19 percent. It expects Azure growth to hold up on fleet efficiency while some third-party GPU contracts slip into the second half, and Windows and devices revenue to fall sharply.

The models put the quarter just above that range: Q2-FY2027 sales middle, average: $97.4B. Q2-FY2027 sales middle growth on Q2-FY2026, average: +20% They follow the company's record of beating its range and keep costs near guidance, so margins fall from the first quarter: Q2-FY2027 base gross margin, average: +66% and Q2-FY2027 base operating margin, average: +47%.

Guidance anchors every model, so the spread is narrow. Q2-FY2027 sales middle, lowest model: $96.9B Q2-FY2027 sales middle, highest model: $98.2B The low end needs capacity slips and a weaker PC market; the high end needs efficiency gains and delayed capacity arriving early.

Q2-FY2027 adjusted EPS middle, average: $4.91 This is non-GAAP, excluding the impact from investments in OpenAI; the models build it from guided costs and tax and assume no OpenAI gain or loss. Q2-FY2027 adjusted EPS middle growth on Q2-FY2026, average: +19%

#### Outlook against result

Q2 FY26 +0.8% above $79.5B–$80.6B → $81.3B guided “USD 79.5 billion to USD 80.6 billion”

Q3 FY26 +1.4% above $80.7B–$81.8B → $82.9B guided “$80.65 to $81.75 billion”

Q4 FY26 +2.5% above $86.7B–$87.8B → $90.0B guided “between USD 86.7 billion and USD 87.8 billion”

Q1 FY27 +1.5% above $89.8B–$91.0B → $92.3B guided “between 89.85 and 90.95 billion U.S. dollars”

Q2 FY27 +0.3% above $96.0B–$97.1B → $97.4B guided “between $96 and $97.1 billion U.S. dollars”

Each outlook is the one the company gave before the quarter. The last row is the models' forecast.

#### The quarter forecast, line by line

| Line | Q1 FY27 reported | Q2 FY26 reported | Q2 FY27 forecast | Q3 FY26 reported | Q3 FY27 forecast |
| --- | --- | --- | --- | --- | --- |
| Revenue | $92.3B | $81.3B | $97.4B | $82.9B | $99.1B |
| Cost of revenue | $29.7B | $26.0B | $32.9B | $26.8B | $34.1B |
| Gross margin | $62.6B | $55.3B | $64.5B | $56.1B | $65.0B |
| Gross margin | 67.8% | 68.0% | 66.2% | 67.6% | 65.6% |
| Research and development | $9.05B | $8.50B | $9.68B | $8.91B | $9.96B |
| Sales and marketing | $5.72B | $6.58B | $6.83B | $6.81B | $7.03B |
| General and administrative | $1.88B | $1.93B | $2.05B | $1.93B | $2.07B |
| Operating income | $45.9B | $38.3B | $46.0B | $38.4B | $45.9B |
| Operating margin | 49.8% | 47.1% | 47.2% | 46.3% | 46.3% |
| Other income (expense), net | $0.04B | $9.97B | −$0.30B | $0.94B | −$0.35B |
| Income before income taxes | $46.0B | $48.2B | $45.7B | $39.3B | $45.6B |
| Provision for income taxes | $9.32B | $9.79B | $9.16B | $7.56B | $9.13B |
| Tax rate | 20.3% | 20.3% | 20.0% | 19.2% | 20.0% |
| Net income | $36.6B | $38.5B | $36.5B | $31.8B | $36.4B |
| Diluted | 7.45B | 7.46B | 7.44B | 7.45B | 7.43B |
| Adjusted EPS | $4.89 | $4.14 | $4.91 | $4.27 | $4.90 |

The lines as the company's statement shows them. The forecast columns are the average of the models, line by line. Earnings per share is the headline's: the company's own for the reported quarter, and for a forecast quarter worked out from the averaged lines with the company's adjustments.

#### What it rests on

**Revenue outlook**

A total revenue range implying growth in the high teens “Therefore, at a total company level, revenue should be between $96 and $97.1 billion U.S. dollars, or growth of 18 to 19 percent.” October 2026 earnings call

**Azure outlook**

Strong constant-currency growth, with some third-party GPU contracts delayed to the second half “In Azure, we expect revenue growth of 49% to 50% in constant currency with continued efficiency gains across our CPU and GPU fleet, helping to offset some 3P GPU-as-a-service contracts that have been delayed to H2.” October 2026 earnings call

**Cost outlook**

Cost of revenue growing far faster than operating expense “We expect COGS of $32.7 to $32.9 billion U.S. dollars, or growth of 26 to 27 percent, and operating expense of $18.5 to $18.6 billion U.S. dollars, or growth of 9 percent, driven by continued investment in R&D compute capacity and talent.” October 2026 earnings call

**Windows to PC makers**

Windows OEM and devices revenue to decline in the mid-30s percent “Windows OEM and devices revenue should decline in the mid-30s.” October 2026 earnings call

**Capital spending outlook**

Higher than the first quarter, including finance leases “In Q2, we expect CapEx spend will be over $50 billion.” October 2026 earnings call

**First-quarter revenue**

Q1-FY2027 sales, reported: $92.3B “This quarter, revenue was $92.3 billion, up 19%.” October 2026 earnings call

#### The six models

All six sit near the company's range. GLM, lowest with Kimi, says the company's own 'guidance is the backbone of my next-quarter forecast'. Sol, the highest, says 'I expect additional monetization of fleet efficiencies and premium productivity usage.' Sol's range is also the widest: its low has 'Capacity deliveries disappoint'; its high has 'customers pay for more valuable agents across multiple products'.

**Middle** the forecast **50% range** 1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside. **80% range** 1 in 10 chance below this line, 1 in 10 above it. These are the low and high printed by each number.

PricedIn **$97.4B** $95.2B – $99.7B

$96B $98B

##### adjusted EPS

PricedIn **$4.91** $4.60 – $5.21

$4.60 $4.80 $5.00 $5.20

#### Low and high

Base the middle forecast

Key assumptions

- ****Revenue lands just above the top of the guided range.** The company beat the top of its range in the first quarter and in each quarter before. *2 of 6***
  - **Opus 5.5** In the first quarter it beat the top of its revenue guidance by about $1.3 billion, so I put the middle at about $97.8 billion, a little above the top of the range.
  - **GLM 5.3** I set my middle at $96.9 billion (above the midpoint, since Q1 beat the top of guidance) and build EPS of about $4.85 from these lines.
- ****Azure grows near or slightly above its guided pace.** Demand exceeds supply and fleet efficiency offsets delayed third-party capacity. *2 of 6***
  - **GLM 5.3** I assume Azure growth holds near 49% in Q2
  - **DeepSeek V4.1 Flash** I take Azure to about 51% and Microsoft 365 commercial cloud to about 19.5%, which is what lifts revenue above the top of the guided range.
- ****No gain or loss from the OpenAI investment.** These swing widely and are excluded from the company's non-GAAP results. *2 of 6***
  - **GLM 5.3** I assume no OpenAI investment impact in my forecast quarters and declare the adjustment item as none
  - **Kimi K3.1 Pro** Adjusted earnings exclude the $207 million OpenAI gain, and I forecast no future OpenAI adjustment because those gains and losses are not reliably forecastable.
- ****Costs land near guidance, so margins fall from the first quarter.** Guided cost of revenue grows much faster than revenue on Azure mix and depreciation. *1 of 6***
  - **Opus 5.5** I put cost of revenue at about $33.0 billion, slightly above the guided range because my revenue is higher.
- ****Windows sales to PC makers fall sharply, as guided.** Channel inventory is elevated and the year-earlier quarter had Windows 10 end-of-support demand. *1 of 6***
  - **GLM 5.3** This is the main negative in my forecast and the reason Devices and Consumer stays roughly flat-to-down in dollars through FY2027.

If all of this happens

**$97B** sales

**$4.91** adjusted EPS

**$44.8B** Capital spending

**$2.25B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $47.0B |
| --- | --- |
| Less capital spending | −$44.8B |
| Free cash flow | $2.25B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $36.8B |
| --- | --- |
| Depreciation, amortization, and other | $13.0B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $2.00B |
| Unearned revenue and other working capital | −$8.94B |
| Operating cash flow | $46.2B |
| Less capital spending | −$45.0B |
| Free cash flow | $1.20B |

**Net income**

The planned net income, with no OpenAI effect.

**Depreciation, amortization, and other**

Rising from $11.7 billion in the first quarter.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

A smaller benefit than in the first quarter.

**Unearned revenue and other working capital**

Unearned revenue usually falls in the second quarter, by $7.5 billion a year earlier.

##### Capital spending — model forecast

Cash spending of about $45 billion against guidance of over $50 billion including finance leases. The split follows the first-quarter mix as an assumption.

| short-lived assets, primarily CPUs and GPUs | $33.8B |
| --- | --- |
| long-lived assets | $11.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $45.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of about three-quarters of cash capital spending.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “In Q2, we expect CapEx spend will be over $50 billion.”

**GPT-6.1 Sol**

| Adjusted net income | $37.2B |
| --- | --- |
| Depreciation, amortization, and other | $13.0B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $3.00B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$12.0B |
| Operating cash flow | $44.5B |
| Less capital spending | −$45.0B |
| Free cash flow | −$500M |

**Adjusted net income**

The quarter plan yields $37.2 billion before any separate adjustment, or $5.00 on 7.44 billion diluted shares; OpenAI investment remeasurement is assumed zero.

**Depreciation, amortization, and other**

Forecast depreciation rises from the September fleet as new servers enter service; building-life extension does not eliminate server depreciation.

**Stock-based compensation expense**

Forecast modest growth from the recent quarterly expense.

**Deferred income taxes**

Forecast tax deductions on investment defer part of the 20% earnings tax provision.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast $4 billion receivable growth, $9 billion advance-billing runoff, $2 billion operating prepayments and $1 billion tax use, offset by $4 billion operating payables and accruals. December collections are seasonally below September's release of June receivables.

##### Capital spending — model forecast

My $45 billion cash spending forecast allows headline investment above $50 billion through noncash leases and delivery/payment timing. Five percent cannot responsibly be allocated more finely. No noncash leased asset or acquisition is counted in this capital-spending measure.

| Servers, network equipment, and software | $33.8B |
| --- | --- |
| Buildings and improvements | $9.00B |
| Unallocated capital spending | $2.25B |
| Total capital spending | $45.0B |

**Servers, network equipment, and software** My 75% cash-purchase allocation assumes computing equipment remains the principal investment. It is not the company's quoted lease-inclusive spending mix.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% physical-infrastructure allocation supports continued capacity expansion, without attributing dollars to individual sites.

“Buildings and improvements” “And cash paid for PP&E was $39.4 billion.” “Cash flow from operations was $58 billion, up 29%, driven by strong cloud billings and collections.”

**GLM 5.3**

| Net income, non-GAAP (about $4.85 adjusted EPS on about 7.44 billion diluted shares) | $36.1B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $17.2B |
| Working capital - unearned revenue, receivables, payables | −$7.50B |
| Other operating items | $1.18B |
| Operating cash flow | $47.0B |
| Less capital spending | −$44.0B |
| Free cash flow | $3.00B |

**Net income, non-GAAP (about $4.85 adjusted EPS on about 7.44 billion diluted shares)**

Forecast assumption: built from company guidance - revenue about $96.9 billion, gross margin about 66%, operating expense about $18.6 billion, other income and expense about negative $300 million, tax rate about 20% - with no OpenAI investment impact assumed.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation steps up to about $13 billion as new capacity enters service, stock-based compensation about $3.2 billion, deferred taxes slightly positive.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: the December quarter is seasonally the weakest for cash conversion (unearned revenue typically declines and receivables build before the June billings peak), similar to Q2 in prior years.

**Other operating items**

Forecast assumption: small net other operating sources.

##### Capital spending — model forecast

The company guided Q2 capex (including finance leases) above $50 billion; my cash-basis figure of $44 billion equals that guidance less my assumption of roughly $7 billion of finance leases (Q1 was $7.4 billion), consistent with the cash-paid-for-property-and-equipment basis on which the company reports free cash flow. I split the cash spend across the two categories the company itself names - short-lived assets (CPUs, GPUs, memory and storage) and long-lived assets - on its stated three-quarters/one-quarter mix; the dollar split is my assumption, not a company disclosure. Allocation is complete, so unallocated capex is zero.

| short-lived assets | $33.0B |
| --- | --- |
| long-lived assets | $11.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.0B |

**short-lived assets** My forecast assumption: about three quarters of Q2 cash capital spending buys short-lived assets - servers, GPUs, memory and storage - in line with the mix the company described for Q1; the company guided only to a total (over $50 billion including finance leases), not a split.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter funds long-lived assets - datacenter construction; the company did not disclose a dollar split.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.” “And cash paid for PP&E was $39.4 billion. Cash flow from operations was $58 billion, up 29%, driven by strong cloud billings and collections.”

**Kimi K3.1 Pro**

| Adjusted net income | $36.2B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $18.0B |
| Deferred taxes and other operating adjustments | $1.00B |
| Operating assets and liabilities | −$8.00B |
| Operating cash flow | $47.2B |
| Less capital spending | −$45.0B |
| Free cash flow | $2.16B |

**Adjusted net income**

Base adjusted net income is the quarter-plan amount, equal to reported net income because no OpenAI effect is forecast.

**Depreciation, amortization, and stock-based compensation**

Depreciation rises with the infrastructure fleet and stock compensation remains a steady non-cash add-back.

**Deferred taxes and other operating adjustments**

Deferred taxes and other items make a moderate positive contribution.

**Operating assets and liabilities**

An independently estimated $8.0 billion use of cash for normal second-quarter seasonality: receivables, unearned revenue, and compensation-related movements outweigh collections and other liability sources. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Cash additions are below total capital expenditures because finance leases are excluded from this free-cash-flow measure. The 75%/25% allocation is my estimate from the latest disclosed mix, not a company forecast of cash spending by category.

| Short-lived assets, primarily CPUs and GPUs | $33.8B |
| --- | --- |
| Long-lived assets | $11.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $45.0B |

**Short-lived assets, primarily CPUs and GPUs** My forecast assigns 75% of cash additions to short-lived compute assets, reflecting the latest disclosed total-capital-expenditure mix.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** My forecast assigns 25% to long-lived datacenter and related infrastructure.

“The remaining spend was for long-lived assets.” “And cash paid for PP&E was $39.4 billion.” “Next, capital expenditures. In Q2, we expect CapEx spend will be over $50 billion.”

**Gemini 4 Argon**

| Net income | $36.6B |
| --- | --- |
| Depreciation, amortization, and other | $12.8B |
| Stock-based compensation expense | $3.35B |
| Deferred income taxes | $2.50B |
| Net working capital and unearned revenue movements | −$8.21B |
| Operating cash flow | $47.0B |
| Less capital spending | −$45.0B |
| Free cash flow | $2.00B |

**Net income**

Forecast Q2-FY2027 base-case net income of $36.56 billion from our quarter plan, corresponding to $4.91 diluted EPS across 7,444 million diluted shares.

**Depreciation, amortization, and other**

Forecast $12.8 billion of depreciation, amortization, and other non-cash charges, up from $11.744 billion in Q1-FY2027 as new server cohorts begin depreciating.

**Stock-based compensation expense**

Forecast $3.35 billion of stock-based compensation, reflecting normal Q2 seasonal step-up from annual stock grants (compared with $3.134 billion in Q1-FY2027 and $3.219 billion in Q2-FY2026).

**Deferred income taxes**

Forecast $2.5 billion positive operating cash flow adjustment from deferred income taxes.

**Net working capital and unearned revenue movements**

Forecast $8.21 billion net working capital outflow, reflecting Q2's normal seasonal unearned revenue run-off (which was -$7.483 billion in Q2-FY2026) and smaller post-Q1 accounts receivable collections.

##### Capital spending — model forecast

Management guided Q2-FY2027 total CapEx (including finance leases) to over $50 billion and CY2026 total CapEx to approximately $170 billion (implying ~$51.9 billion total CapEx in Q2-FY2027 after $118.1 billion in Q1-Q3 CY2026). Excluding ~$6.9 billion of forecast non-cash finance lease commencements, we forecast cash additions to property and equipment of $45.0 billion, allocated $33.5 billion to Servers, network equipment, and software, $9.5 billion to Buildings and improvements, and $2.0 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $33.5B |
| --- | --- |
| Buildings and improvements | $9.50B |
| Unallocated capital spending | $2.00B |
| Total capital spending | $45.0B |

**Servers, network equipment, and software** Model estimate allocating $33.5 billion (74.4% of Q2-FY2027 cash CapEx) to short-lived GPU/CPU servers, memory, storage, and networking equipment, aligned with management's Q1-FY2027 disclosure that roughly three-quarters of CapEx is for short-lived assets.

“Servers, network equipment, and software 244,840 215,874” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications. The remaining spend was for long-lived assets.”

**Buildings and improvements** Model estimate allocating $9.5 billion (21.1% of Q2-FY2027 cash CapEx) to owned datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “And cash paid for PP&E was $39.4 billion. Cash flow from operations was $58 billion, up 29%, driven by strong cloud billings and collections. And free cash flow was $18.6 billion, reflecting higher capital expenditures.” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**DeepSeek V4.1 Flash**

| Net income | $36.2B |
| --- | --- |
| Depreciation, amortization, and other | $13.2B |
| Stock-based compensation expense | $3.30B |
| Accounts receivable and unearned revenue, net | $0 |
| Other operating items, net | −$2.30B |
| Operating cash flow | $50.4B |
| Less capital spending | −$44.8B |
| Free cash flow | $5.62B |

**Net income**

Base case net income, $4.87 a share; no OpenAI gain or loss assumed.

**Depreciation, amortization, and other**

First quarter was $11.7 billion; rises as short-lived assets enter service.

**Stock-based compensation expense**

About 3.4% of revenue, in line with the first quarter.

**Accounts receivable and unearned revenue, net**

December collections of $7 billion offset the seasonal drawdown of unearned revenue.

**Other operating items, net**

A $2.5 billion deferred tax benefit offset by prepayments and cash taxes.

##### Capital spending — model forecast

Cash capital spending is the first quarter's $39.4 billion scaled with the guided increase; nothing is unallocated and the 75/25 asset split is my estimate, not a disclosed plan.

| Short-lived assets, primarily CPUs and GPUs | $33.6B |
| --- | --- |
| Long-lived assets | $11.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.8B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending, the first-quarter proportion.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “And cash paid for PP&E was $39.4 billion.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

High about 1 chance in 10 of better

Q2-FY2027

**$100B** sales · +2% vs base

**$5.21** EPS · +6% vs base

**$46.5B** Capital spending

**$5.30B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $51.9B |
| --- | --- |
| Less capital spending | −$46.5B |
| Free cash flow | $5.30B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $38.3B |
| --- | --- |
| Depreciation, amortization, and other | $13.2B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $2.50B |
| Unearned revenue and other working capital | −$7.30B |
| Operating cash flow | $50.0B |
| Less capital spending | −$47.0B |
| Free cash flow | $3.00B |

**Net income**

High-case earnings of $5.15 a share.

**Depreciation, amortization, and other**

Slightly more capacity in service.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

Similar to recent quarters.

**Unearned revenue and other working capital**

Seasonal fall, offset by strong cloud collections.

##### Capital spending — model forecast

Faster deliveries lift cash spending to about $47 billion. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $35.2B |
| --- | --- |
| long-lived assets | $11.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $47.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “In Q2, we expect CapEx spend will be over $50 billion.”

**GPT-6.1 Sol**

| Adjusted net income | $40.5B |
| --- | --- |
| Depreciation, amortization, and other | $13.2B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $3.30B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$9.50B |
| Operating cash flow | $50.8B |
| Less capital spending | −$48.0B |
| Free cash flow | $2.85B |

**Adjusted net income**

Forecast $5.45 earnings per share times 7.44 billion diluted shares. No future OpenAI remeasurement is modeled.

**Depreciation, amortization, and other**

Forecast faster commissioning increases the depreciating fleet.

**Stock-based compensation expense**

Forecast no immediate change in existing grant expense merely because demand is stronger.

**Deferred income taxes**

Forecast stronger cash investment modestly increases tax deferral.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $3 billion, advance-revenue runoff $8 billion, prepayments $2 billion and taxes $1 billion; operating accruals provide $4.5 billion. Better collections partially cushion normal December cash seasonality.

##### Capital spending — model forecast

More deliveries increase cash investment to $48 billion; noncash lease additions remain outside this measure. The unallocated 5% covers categories and payment timing that cannot be responsibly split. Percentages are my rough assumptions.

| Servers, network equipment, and software | $36.0B |
| --- | --- |
| Buildings and improvements | $9.60B |
| Unallocated capital spending | $2.40B |
| Total capital spending | $48.0B |

**Servers, network equipment, and software** My 75% allocation increases computing purchases as supply becomes usable faster.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation assumes faster physical build completion, not a company site-level forecast.

“Buildings and improvements” “Customer demand continues to exceed available supply.”

**GLM 5.3**

| Net income, non-GAAP | $37.6B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $17.5B |
| Working capital - unearned revenue, receivables, payables | −$4.50B |
| Other operating items | $400M |
| Operating cash flow | $51.0B |
| Less capital spending | −$45.0B |
| Free cash flow | $6.00B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $5.05 on about 7.44 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $13.3 billion with faster capacity additions.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: stronger billings soften the seasonal working-capital drag.

**Other operating items**

Forecast assumption: small other operating sources.

##### Capital spending — model forecast

In the high case billings and collections run stronger and a little more capacity is delivered and paid for, so both operating cash flow and capex are slightly higher.

| short-lived assets | $34.0B |
| --- | --- |
| long-lived assets | $11.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $45.0B |

**short-lived assets** My forecast assumption: the same company-stated mix applied to a slightly higher cash capex total.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of the higher cash capex.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**Kimi K3.1 Pro**

| Adjusted net income | $38.3B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $19.0B |
| Deferred taxes and other operating adjustments | $1.50B |
| Operating assets and liabilities | −$7.50B |
| Operating cash flow | $51.3B |
| Less capital spending | −$48.0B |
| Free cash flow | $3.33B |

**Adjusted net income**

The high earnings case is $5.15 per share on 7.442 billion diluted shares, with no OpenAI adjustment.

**Depreciation, amortization, and stock-based compensation**

A larger deployed asset base and stock compensation increase non-cash add-backs.

**Deferred taxes and other operating adjustments**

Deferred taxes and other items contribute more in the high case.

**Operating assets and liabilities**

An independently estimated $7.5 billion use of cash, with stronger billings and collections modestly reducing the seasonal operating-asset and liability outflow. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The high case pairs higher earnings with higher cash investment. Total capital expenditures remain above the company's over-$50-billion outlook, while cash additions exclude finance leases; category amounts are my allocation.

| Short-lived assets, primarily CPUs and GPUs | $36.0B |
| --- | --- |
| Long-lived assets | $12.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $48.0B |

**Short-lived assets, primarily CPUs and GPUs** Higher demand requires more compute spending; I retain the disclosed 75% asset-life mix as an allocation assumption.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** The remaining quarter of forecast cash additions supports long-lived infrastructure.

“The remaining spend was for long-lived assets.” “Next, capital expenditures. In Q2, we expect CapEx spend will be over $50 billion.”

**Gemini 4 Argon**

| Net income | $38.1B |
| --- | --- |
| Depreciation, amortization, and other | $13.0B |
| Stock-based compensation expense | $3.35B |
| Deferred income taxes | $2.70B |
| Net working capital and unearned revenue movements | −$7.16B |
| Operating cash flow | $50.0B |
| Less capital spending | −$46.5B |
| Free cash flow | $3.50B |

**Net income**

Forecast high-case Q2-FY2027 net income of $38.11 billion, consistent with $5.12 diluted EPS on 7,444 million diluted shares.

**Depreciation, amortization, and other**

Forecast $13.0 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $3.35 billion of stock-based compensation.

**Deferred income taxes**

Forecast $2.7 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast smaller seasonal working capital outflow of -$7.16 billion on stronger commercial billings and collections.

##### Capital spending — model forecast

In the high case, faster server deliveries lift Q2-FY2027 cash CapEx to $46.5 billion ($34.7 billion Servers, network equipment, and software, $9.7 billion Buildings and improvements, and $2.1 billion unallocated).

| Servers, network equipment, and software | $34.7B |
| --- | --- |
| Buildings and improvements | $9.70B |
| Unallocated capital spending | $2.10B |
| Total capital spending | $46.5B |

**Servers, network equipment, and software** Model estimate of $34.7 billion (74.6% of high-case Q2-FY2027 cash CapEx) from earlier server deliveries.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $9.7 billion (20.9% of high-case Q2-FY2027 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**DeepSeek V4.1 Flash**

| Net income | $39.5B |
| --- | --- |
| Depreciation, amortization, and other | $13.2B |
| Stock-based compensation expense | $3.30B |
| Accounts receivable and unearned revenue, net | $3.00B |
| Other operating items, net | −$1.10B |
| Operating cash flow | $57.9B |
| Less capital spending | −$44.8B |
| Free cash flow | $13.1B |

**Net income**

High case net income, about $5.32 a share.

**Depreciation, amortization, and other**

Same base; the upside is utilisation, not more assets.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

Strong collections and bookings.

**Other operating items, net**

A $3.5 billion deferred tax benefit offset by prepayments and cash taxes.

##### Capital spending — model forecast

The extra earnings come from monetising committed capacity, so spending does not rise and free cash flow improves with operating cash flow.

| Short-lived assets, primarily CPUs and GPUs | $33.6B |
| --- | --- |
| Long-lived assets | $11.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.8B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion.”

#### Three ways the high case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Delayed capacity and fleet efficiencies arrive earlier than planned.** The company says efficiency gains already offset delayed GPU contracts, and demand exceeds supply. More usable capacity is sold at once, so Azure grows faster than guided and earnings rise with sales. Cash spending is a little higher as deliveries arrive, Q2-FY2027 high cash capex, average: $46.5B, but stronger collections lift free cash flow: Q2-FY2027 high cash fcf, average: $5.3B
  Watch Azure growth above the guided range at the next report.
  **Model reasoning**
  - **Opus 5.5** Faster capacity delivery and fleet efficiency
  - **DeepSeek V4.1 Flash** Azure growth accelerating to about 55% on earlier capacity delivery and faster monetisation of the CPU and GPU fleet
  - **Kimi K3.1 Pro** Earlier capacity and faster Azure monetization
2. **Copilot and usage-based billing lift Microsoft 365 above its guided growth.** Premium seats such as E7 and usage billing are raising revenue per user. Microsoft 365 commercial cloud adds more revenue within the quarter, raising sales and earnings above the base.
  Watch Microsoft 365 commercial cloud growth at the next report above the guided pace.
  **Model reasoning**
  - **Opus 5.5** Copilot and consumption-based pricing
  - **DeepSeek V4.1 Flash** Microsoft 365 commercial cloud accelerating to about 21% as E7 and Copilot usage-based billing scale
  - **GPT-6.1 Sol** Broader enterprise agent adoption
3. **Holiday games lift gaming in its strongest quarter.** The company expects Xbox content growth to peak in the second quarter on major launches. Gaming revenue rises with the launch calendar, adding to sales in this quarter before easing in the third.
  Watch Xbox content and services growth at the next report above the guided range.
  **Model reasoning**
  - **Opus 5.5** Strong holiday gaming content
  - **Gemini 4 Argon** Stronger holiday gaming monetization from Call of Duty Modern Warfare 4 and Grand Theft Auto 6 alongside an earlier enterprise AI PC refresh cycle in Windows OEM.

Sales would have to clear the top of the range by a wide margin, near Q2-FY2027 sales high, average: $99.7B, with non-GAAP earnings per share near Q2-FY2027 adjusted EPS high, average: $5.21. Delayed third-party capacity and fleet efficiencies would arrive early, Copilot and usage billing would lift Microsoft 365 above its guided growth, and holiday games would lift gaming. Sol goes furthest, Q2-FY2027 sales high, sol: $102B and Q2-FY2027 adjusted EPS high, sol: $5.45, because it alone has customers paying for more valuable agents across multiple products on top of faster commissioning.

Therefore, at the total company level, revenue should be between 89.85 and 90.95 billion U.S. dollars, or growth of 16 to 17 percent, with accelerating commercial growth, partially offset by the impact from the PC market dynamics noted earlier. The quarter then came in at Q1-FY2027 sales, reported: $92.3B, so a beat of this size has a recent precedent.

The six highs run from $98B (GLM 5.3) to $102B (GPT-6.1 Sol).

First sign At the next report, whose date the company has not given: Azure and Microsoft 365 growth above their guided ranges.

Low about 1 chance in 10 of worse

Q2-FY2027

**$95B** sales · −2% vs base

**$4.60** EPS · −6% vs base

**$44.2B** Capital spending

**−$2.58B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $41.6B |
| --- | --- |
| Less capital spending | −$44.2B |
| Free cash flow | −$2.58B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $35.0B |
| --- | --- |
| Depreciation, amortization, and other | $13.0B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $1.50B |
| Unearned revenue and other working capital | −$10.8B |
| Operating cash flow | $42.0B |
| Less capital spending | −$44.0B |
| Free cash flow | −$2.00B |

**Net income**

Low-case earnings of $4.70 a share on 7.444 billion shares, with no OpenAI effect.

**Depreciation, amortization, and other**

Rises from $11.7 billion in the first quarter as capacity enters service.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

Lower than the first quarter's $4.6 billion.

**Unearned revenue and other working capital**

The usual second-quarter fall in unearned revenue, made worse by weaker collections.

##### Capital spending — model forecast

Cash capital spending of about $44 billion: the guidance of over $50 billion including finance leases, less about $6 to $7 billion of leases. It is split by the first quarter's three-quarters mix, which is an assumption.

| short-lived assets, primarily CPUs and GPUs | $33.0B |
| --- | --- |
| long-lived assets | $11.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of about three-quarters of cash capital spending, not a company split of cash spending.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “In Q2, we expect CapEx spend will be over $50 billion.”

**GPT-6.1 Sol**

| Adjusted net income | $33.9B |
| --- | --- |
| Depreciation, amortization, and other | $12.8B |
| Stock-based compensation expense | $3.30B |
| Deferred income taxes | $2.50B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$17.0B |
| Operating cash flow | $35.5B |
| Less capital spending | −$42.0B |
| Free cash flow | −$6.55B |

**Adjusted net income**

Forecast low earnings per share of $4.55 times 7.44 billion diluted shares. Assume no OpenAI investment remeasurement, so reported and adjusted income coincide.

**Depreciation, amortization, and other**

Forecast a rising installed fleet but somewhat slower commissioning than the middle.

**Stock-based compensation expense**

Forecast grants and vesting expense near the recent quarterly pace, not a cash outflow.

**Deferred income taxes**

Assume accelerated investment deductions defer part of the earnings tax provision.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast cash uses of $6 billion for receivables, $10 billion from advance-revenue runoff, $2.5 billion for operating prepayments and $1.5 billion for tax settlements; operating payables and accruals provide $3 billion. Weaker collections and December billing seasonality cause the use; this is not a balancing residual.

##### Capital spending — model forecast

Cash investment excludes noncash lease commencements. Delayed deliveries reduce cash purchases relative to the middle. Five percent remains unallocated across land, leasehold work, furniture and settlement timing because a precise category split is not disclosed. The 75/20/5 allocation is my estimate, not guidance.

| Servers, network equipment, and software | $31.5B |
| --- | --- |
| Buildings and improvements | $8.40B |
| Unallocated capital spending | $2.10B |
| Total capital spending | $42.0B |

**Servers, network equipment, and software** My rough allocation of 75% of forecast cash investment, emphasizing computing equipment; not a company dollar plan.

“Servers, network equipment, and software”

**Buildings and improvements** My rough 20% allocation to already committed physical infrastructure, which cannot be halted immediately.

“Buildings and improvements” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**GLM 5.3**

| Net income, non-GAAP | $35.2B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $16.8B |
| Working capital - unearned revenue, receivables, payables | −$10.0B |
| Other operating items | $1.00B |
| Operating cash flow | $43.0B |
| Less capital spending | −$44.5B |
| Free cash flow | −$1.50B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $4.72 on about 7.45 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $12.8 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: weaker billings deepen the seasonal drag.

**Other operating items**

Forecast assumption: small other operating sources.

##### Capital spending — model forecast

In the low case revenue lands at the guidance floor and working capital is a bigger drag, while capex stays committed - the company has already contracted for the deliveries - so free cash flow is roughly breakeven.

| short-lived assets | $33.5B |
| --- | --- |
| long-lived assets | $11.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.5B |

**short-lived assets** My forecast assumption: the company-stated mix applied to slightly higher cash capex as deliveries catch up even in a softer quarter.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of cash capex for datacenter builds.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**Kimi K3.1 Pro**

| Adjusted net income | $33.9B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $17.0B |
| Deferred taxes and other operating adjustments | $500M |
| Operating assets and liabilities | −$8.50B |
| Operating cash flow | $42.9B |
| Less capital spending | −$47.0B |
| Free cash flow | −$4.14B |

**Adjusted net income**

The low earnings case is $4.55 per share on 7.442 billion diluted shares, with no OpenAI adjustment.

**Depreciation, amortization, and stock-based compensation**

Growing infrastructure depreciation and stock compensation add back non-cash expense, below the base case.

**Deferred taxes and other operating adjustments**

A modest positive contribution from deferred taxes and other operating items.

**Operating assets and liabilities**

An independently estimated $8.5 billion use of cash, reflecting seasonal receivable and unearned-revenue outflows and weaker collections, partly offset by operating liabilities. Operating cash flow is now the sum of the walk.

##### Capital spending — model forecast

The company guides to total second-quarter capital expenditures above $50 billion including finance leases. This low case assumes $47 billion of cash additions to property and equipment, with the disclosed 75%/25% asset-life mix applied only as my allocation assumption.

| Short-lived assets, primarily CPUs and GPUs | $35.2B |
| --- | --- |
| Long-lived assets | $11.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $47.0B |

**Short-lived assets, primarily CPUs and GPUs** Forecast allocation of 75% of cash spending to compute and related components, not a company-published cash-spending split.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** Forecast allocation of the remaining 25% to facilities and other long-lived infrastructure.

“The remaining spend was for long-lived assets.” “Next, capital expenditures. In Q2, we expect CapEx spend will be over $50 billion.” “Additions to property and equipment (39,367) (19,394)”

**Gemini 4 Argon**

| Net income | $35.1B |
| --- | --- |
| Depreciation, amortization, and other | $12.6B |
| Stock-based compensation expense | $3.35B |
| Deferred income taxes | $2.30B |
| Net working capital and unearned revenue movements | −$9.39B |
| Operating cash flow | $44.0B |
| Less capital spending | −$43.0B |
| Free cash flow | $1.00B |

**Net income**

Forecast low-case Q2-FY2027 net income of $35.14 billion, consistent with $4.72 diluted EPS on 7,444 million diluted shares.

**Depreciation, amortization, and other**

Forecast $12.6 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $3.35 billion of stock-based compensation.

**Deferred income taxes**

Forecast $2.3 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast larger seasonal working capital outflow of -$9.39 billion on softer enterprise billings.

##### Capital spending — model forecast

In the low case, additional equipment and site delays reduce Q2-FY2027 cash CapEx to $43.0 billion ($32.0 billion Servers, network equipment, and software, $9.1 billion Buildings and improvements, and $1.9 billion unallocated).

| Servers, network equipment, and software | $32.0B |
| --- | --- |
| Buildings and improvements | $9.10B |
| Unallocated capital spending | $1.90B |
| Total capital spending | $43.0B |

**Servers, network equipment, and software** Model estimate of $32.0 billion (74.4% of low-case Q2-FY2027 cash CapEx) due to equipment shipment delays.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $9.1 billion (21.2% of low-case Q2-FY2027 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “Capital expenditures were $45.2 billion, as some third-party capacity deliveries we expected in Q1 were delayed.”

**DeepSeek V4.1 Flash**

| Net income | $32.3B |
| --- | --- |
| Depreciation, amortization, and other | $13.2B |
| Stock-based compensation expense | $3.30B |
| Accounts receivable and unearned revenue, net | −$3.00B |
| Other operating items, net | −$3.30B |
| Operating cash flow | $42.5B |
| Less capital spending | −$44.8B |
| Free cash flow | −$2.30B |

**Net income**

Low case net income, about $4.35 a share.

**Depreciation, amortization, and other**

First quarter was $11.7 billion; rises with the fleet.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

December collections offset by the seasonal drawdown of the 30 June unearned balance.

**Other operating items, net**

Deferred taxes, prepayments and cash taxes.

##### Capital spending — model forecast

Spending is committed and the same in all three cases; only cash from operations moves. The asset split is my estimate applied to cash paid for property and equipment, which is what the company's free cash flow subtracts.

| Short-lived assets, primarily CPUs and GPUs | $33.6B |
| --- | --- |
| Long-lived assets | $11.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $44.8B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending, the first-quarter proportion.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion.”

#### Three ways the low case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Azure capacity slips again and growth falls short of the guided pace.** Some third-party GPU contracts are already delayed to the second half, and demand exceeds supply. Fewer usable servers cap Azure revenue this quarter while installed capacity still depreciates, so sales and earnings both fall. Cash spending stays near plan because deliveries are contracted, so free cash flow turns negative: Q2-FY2027 low cash fcf, average: −$2.6B
  Watch The company saying at its next report that third-party capacity slipped again, or Azure growth below the guided range.
  **Model reasoning**
  - **Opus 5.5** Azure growth held back by capacity
  - **GPT-6.1 Sol** Delayed usable cloud capacity
  - **DeepSeek V4.1 Flash** Azure and Foundry revenue growth slowing to about 40% as delayed third-party GPU-as-a-service capacity slips out of the quarter again
2. **Windows sales to PC makers fall harder than the guided decline.** Channel inventory is elevated and higher component prices are weakening the PC market. The models call this the quarter's main drag; a deeper fall lowers the consumer half of sales and earnings within the quarter, without touching cloud.
  Watch Windows OEM and devices revenue at the next report falling more than the guided decline.
  **Model reasoning**
  - **Opus 5.5** Windows and devices decline deeper than the mid-30s percent
  - **DeepSeek V4.1 Flash** Windows OEM and devices falling closer to 40% as channel inventory stays elevated and PC prices rise
  - **GLM 5.3** A weak PC market keeping Windows OEM in decline
3. **Component and depreciation costs push cost of revenue above guidance.** Memory and storage prices are rising and new capacity depreciates before it earns revenue. Gross margin falls below the base, so earnings fall further than sales. DeepSeek adds faster operating-expense growth, which is why its earnings low is the deepest.
  Watch Total cost of revenue at the next report above the guided range.
  **Model reasoning**
  - **Opus 5.5** Depreciation and component costs squeeze gross margin
  - **DeepSeek V4.1 Flash** memory and storage component inflation pushing cost of revenue up faster than revenue
  - **Kimi K3.1 Pro** Higher infrastructure depreciation and component costs

Sales would have to land at or below the bottom of the company's range, around Q2-FY2027 sales low, average: $95.2B, with non-GAAP earnings per share near Q2-FY2027 adjusted EPS low, average: $4.60. That takes Azure capacity slipping further, a deeper fall in Windows sales to PC makers, and component and depreciation costs running ahead of revenue together. Sol goes furthest on sales, Q2-FY2027 sales low, sol: $94.0B, because it alone adds lower paid usage and token pricing to the capacity delay. DeepSeek goes furthest on earnings, Q2-FY2027 adjusted EPS low, deepseek: $4.35, because it alone also lets operating expense grow at a low-double-digit rate as research compute, talent and data costs rise.

The company has beaten the top of its total revenue range in every quarter since it began giving one, so a result near the bottom would break that record.

The six lows run from $94B (GPT-6.1 Sol) to $96B (GLM 5.3).

First sign At the next report, whose date the company has not given: Azure growth and cost of revenue against the guided ranges.

#### Watch

The second-quarter report, not yet dated: Azure growth against its guided range, cost of revenue against guidance, the Windows decline, and whether delayed third-party capacity is still due in the second half. A third-quarter range above the models' middle points higher; another capacity delay points lower.

For the third quarter, the models expect Q3-FY2027 sales middle, average: $99.1B, a small step up as delayed capacity starts to arrive.

Sales **$99B** +20% on Q3 FY26 ($83B)

*50% range* $97B – $101B *80% range* $95B – $103B

Adjusted EPS **$4.90** +15% on Q3 FY26 ($4.27) Q3 FY26 on the company's earlier definition: “Impact from OpenAI” added since, “Adjustment” dropped since

*50% range* $4.71 – $5.09 *80% range* $4.50 – $5.30

#### Investment and cash generation

Base case

Capital spending **$49.4B**

Free cash flow **$9.27B**

Free cash flow: operating cash flow less capital spending.

- **Spending accelerates as delayed third-party capacity and more CPUs and GPUs arrive: Q3-FY2027 base cash capex, average: $49.4B, measured as cash paid for property and equipment, which leaves out finance leases. Most buys short-lived servers that can earn revenue within months. Collections of December billings make this a stronger cash quarter, so free cash flow, operating cash flow less that spending, recovers: Q3-FY2027 base cash fcf, average: $9.3B *3 of 6***
  - **Opus 5.5** That raises my third-quarter capital spending and supports Azure growth later in the year.
  - **Kimi K3.1 Pro** Free cash flow uses operating cash flow less cash additions to property and equipment, not total capital expenditures including finance leases.
  - **GLM 5.3** I use that same cash basis for my capex and free-cash-flow forecasts

This is the quarter whose outlook the company gives at its next report, so no range exists yet. A year earlier it brought Q3-FY2026 sales, reported: $82.9B. The company has said delayed third-party capacity shifts into the second half of the fiscal year, when capital spending accelerates.

The company also said Xbox content growth peaks in the second quarter and eases in the third, Windows trends continue through the year, and Microsoft 365 commercial cloud growth should accelerate through the year.

The models expect Q3-FY2027 sales middle, average: $99.1B. Q3-FY2027 sales middle growth on Q3-FY2026, average: +20% That is only a small step from the second quarter. Depreciation rises as new capacity enters service and finance-lease interest grows, so Q3-FY2027 Operating margin, forecast average: +46%.

They differ on how much delayed capacity sells at once. Q3-FY2027 sales middle growth, glm: +0.3% Q3-FY2027 sales middle growth, sol: +3.4% Sol's range is by far the widest, from capacity that disappoints to agents adopted across products.

Q3-FY2027 adjusted EPS middle, average: $4.90 On the non-GAAP basis it is roughly flat on the second quarter, as higher depreciation and interest absorb the extra sales; no OpenAI gain or loss is assumed. Q3-FY2027 adjusted EPS middle growth on Q3-FY2026, average: +15%

#### The quarter forecast, line by line

| Line | Q1 FY27 reported | Q2 FY26 reported | Q2 FY27 forecast | Q3 FY26 reported | Q3 FY27 forecast |
| --- | --- | --- | --- | --- | --- |
| Revenue | $92.3B | $81.3B | $97.4B | $82.9B | $99.1B |
| Cost of revenue | $29.7B | $26.0B | $32.9B | $26.8B | $34.1B |
| Gross margin | $62.6B | $55.3B | $64.5B | $56.1B | $65.0B |
| Gross margin | 67.8% | 68.0% | 66.2% | 67.6% | 65.6% |
| Research and development | $9.05B | $8.50B | $9.68B | $8.91B | $9.96B |
| Sales and marketing | $5.72B | $6.58B | $6.83B | $6.81B | $7.03B |
| General and administrative | $1.88B | $1.93B | $2.05B | $1.93B | $2.07B |
| Operating income | $45.9B | $38.3B | $46.0B | $38.4B | $45.9B |
| Operating margin | 49.8% | 47.1% | 47.2% | 46.3% | 46.3% |
| Other income (expense), net | $0.04B | $9.97B | −$0.30B | $0.94B | −$0.35B |
| Income before income taxes | $46.0B | $48.2B | $45.7B | $39.3B | $45.6B |
| Provision for income taxes | $9.32B | $9.79B | $9.16B | $7.56B | $9.13B |
| Tax rate | 20.3% | 20.3% | 20.0% | 19.2% | 20.0% |
| Net income | $36.6B | $38.5B | $36.5B | $31.8B | $36.4B |
| Diluted | 7.45B | 7.46B | 7.44B | 7.45B | 7.43B |
| Adjusted EPS | $4.89 | $4.14 | $4.91 | $4.27 | $4.90 |

The lines as the company's statement shows them. The forecast columns are the average of the models, line by line. Earnings per share is the headline's: the company's own for the reported quarter, and for a forecast quarter worked out from the averaged lines with the company's adjustments.

#### What it rests on

**Delayed capacity**

Some third-party GPU contracts delayed to the second half “In Azure, we expect revenue growth of 49% to 50% in constant currency with continued efficiency gains across our CPU and GPU fleet, helping to offset some 3P GPU-as-a-service contracts that have been delayed to H2.” October 2026 earnings call

**Second-half spending**

Capital spending accelerates on CPUs, GPUs and delayed capacity “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.” October 2026 earnings call

**Gaming timing**

Growth strongest in the second quarter, slowing in the third “With content launch patterns through the year, we expect growth to be the strongest in the second quarter, with some deceleration in Q3 and further moderation in Q4.” October 2026 earnings call

**Microsoft 365 growth**

Expected to accelerate through the year on revenue per user “Growth will be driven primarily by ARPU, with additional contribution from SEATs, and we continue to expect revenue growth to accelerate through the year.” October 2026 earnings call

**Windows trend**

PC-market weakness expected to continue all year “We expect these trends to continue through the rest of the fiscal year.” October 2026 earnings call

#### The six models

All six put the quarter only slightly above the second. GLM, the lowest, has Azure easing 'as prior-year comparables stiffen'. Sol, the highest, adds revenue 'as delayed capacity starts arriving'. Sol's range is much the widest: at its low end 'Capacity deliveries disappoint, customers become more price-sensitive'; at its high end 'customers pay for more valuable agents across multiple products'.

**Middle** the forecast **50% range** 1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside. **80% range** 1 in 10 chance below this line, 1 in 10 above it. These are the low and high printed by each number.

PricedIn **$99B** $95B – $103B

$96B $98B $100B $102B

##### adjusted EPS

PricedIn **$4.90** $4.50 – $5.30

$4.60 $4.80 $5.00 $5.20

#### Low and high

Base the middle forecast

Key assumptions

- ****Delayed third-party capacity starts arriving and sells quickly.** Demand exceeds supply and the company moved delayed deliveries into the second half. *2 of 6***
  - **GPT-6.1 Sol** My March estimate is $101.5 billion as delayed capacity starts arriving; strong prior comparisons and weak personal computers restrain acceleration.
  - **Opus 5.5** That raises my third-quarter capital spending and supports Azure growth later in the year.
- ****Azure growth eases from the second quarter on tougher year-earlier comparisons.** Azure accelerated through fiscal 2026, so the comparison base is higher. *1 of 6***
  - **GLM 5.3** moderates to the mid-40s in H2 FY2027 as prior-year comparables stiffen
- ****Depreciation rises as new capacity enters service, holding earnings flat.** Short-lived servers depreciate from the day they enter service. *1 of 6***
  - **Opus 5.5** I carry this up to about $13 billion in the second quarter and $14.5 billion in the third as new capacity goes into service.
  - **Opus 5.5** Depreciation rises fast because short-lived servers wear out over six years, which pushes gross margin down over time.
- ****Gaming steps down after the holiday quarter.** The company expects Xbox content growth to slow in the third quarter. *1 of 6***
  - **GLM 5.3** I build roughly $7 billion of Xbox revenue into Q2 and a sequential step down in Q3
- ****Other income turns more negative on finance-lease interest.** Interest on data center finance leases now exceeds interest income. *1 of 6***
  - **Opus 5.5** For the third quarter I deepen other income to minus $400 million because finance-lease interest keeps growing.

If all of this happens

**$99B** sales

**$4.90** adjusted EPS

**$49.4B** Capital spending

**$9.27B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $58.7B |
| --- | --- |
| Less capital spending | −$49.4B |
| Free cash flow | $9.27B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $36.8B |
| --- | --- |
| Depreciation, amortization, and other | $14.5B |
| Stock-based compensation expense | $3.20B |
| Deferred income taxes | $2.00B |
| Accounts receivable, unearned revenue and other working capital | $2.55B |
| Operating cash flow | $59.0B |
| Less capital spending | −$52.0B |
| Free cash flow | $7.00B |

**Net income**

The planned third-quarter net income.

**Depreciation, amortization, and other**

Rising with capacity in service.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

Assumed.

**Accounts receivable, unearned revenue and other working capital**

Collections of December billings, as in past third quarters.

##### Capital spending — model forecast

The company expects spending to accelerate in the second half, so cash spending rises to about $52 billion. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $39.0B |
| --- | --- |
| long-lived assets | $13.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $52.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**GPT-6.1 Sol**

| Adjusted net income | $37.3B |
| --- | --- |
| Depreciation, amortization, and other | $14.5B |
| Stock-based compensation expense | $3.40B |
| Deferred income taxes | $3.50B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$2.50B |
| Operating cash flow | $56.2B |
| Less capital spending | −$50.0B |
| Free cash flow | $6.18B |

**Adjusted net income**

The quarter plan produces $37.28 billion adjusted income, or about $5.02 per share on 7.43 billion diluted shares. OpenAI remeasurement and separate adjustments are zero.

**Depreciation, amortization, and other**

Forecast the growing fleet adds depreciation through the fiscal year.

**Stock-based compensation expense**

Forecast modest compensation growth from December.

**Deferred income taxes**

Forecast tax deductions on cash investment defer part of the earnings provision.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $5 billion, advance-revenue runoff $0.5 billion and prepayments $2 billion. Operating accruals supply $4 billion and tax timing $1 billion. These billing and collection assumptions improve cash conversion from the December seasonal trough.

##### Capital spending — model forecast

The $50 billion cash estimate captures some deliveries postponed from the first half. It is separate from lease-inclusive capital guidance. Five percent remains unallocated among other asset categories and timing effects; all amounts are my assumptions.

| Servers, network equipment, and software | $37.5B |
| --- | --- |
| Buildings and improvements | $10.0B |
| Unallocated capital spending | $2.50B |
| Total capital spending | $50.0B |

**Servers, network equipment, and software** My 75% allocation follows equipment-heavy capacity delivery and replacement needs.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation assumes continued completion of physical infrastructure without attributing an exact amount to any named site.

“Buildings and improvements” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**GLM 5.3**

| Net income, non-GAAP (about $4.78 adjusted EPS on about 7.43 billion diluted shares) | $35.5B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $17.7B |
| Working capital - unearned revenue, receivables, payables | $6.00B |
| Other operating items | $820M |
| Operating cash flow | $60.0B |
| Less capital spending | −$49.0B |
| Free cash flow | $11.0B |

**Net income, non-GAAP (about $4.78 adjusted EPS on about 7.43 billion diluted shares)**

Forecast assumption: revenue about $97.2 billion (up about 17% on a tougher Azure comparable), gross margin about 65.6%, operating expense about $19.2 billion, other income and expense about negative $300 million, tax about 20%, no OpenAI investment impact.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $14 billion as second-half capacity deliveries enter service; stock-based compensation about $3.2 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: the March quarter typically recovers from the December trough as billings and collections improve.

**Other operating items**

Forecast assumption: small other operating sources.

##### Capital spending — model forecast

The company said capital expenditures accelerate in the second half of fiscal 2027 from CPUs, GPUs and third-party capacity that slipped from the first half; my $49 billion cash figure is the forecast of that step-up from Q2's $44 billion, excluding finance leases. Allocation across the two company-named categories follows its stated mix and is my assumption; unallocated capex is zero.

| short-lived assets | $36.5B |
| --- | --- |
| long-lived assets | $12.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $49.0B |

**short-lived assets** My forecast assumption: about three quarters of Q3 cash capital spending as delayed third-party GPU capacity and more CPUs arrive, per the company's stated second-half acceleration; the dollar split is my estimate.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter funds datacenter construction; no dollar split disclosed.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.” “And free cash flow was $18.6 billion, reflecting higher capital expenditures.”

**Kimi K3.1 Pro**

| Adjusted net income | $36.2B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $19.5B |
| Deferred taxes and other operating adjustments | $1.00B |
| Operating assets and liabilities | $3.50B |
| Operating cash flow | $60.2B |
| Less capital spending | −$48.0B |
| Free cash flow | $12.2B |

**Adjusted net income**

Base adjusted net income equals the quarter-plan amount and assumes no OpenAI effect.

**Depreciation, amortization, and stock-based compensation**

Depreciation continues to rise as new capacity enters service, alongside stock compensation.

**Deferred taxes and other operating adjustments**

Deferred taxes and other items provide a moderate add-back.

**Operating assets and liabilities**

An independently estimated $3.5 billion source of cash from third-quarter billings, collections, and liability seasonality. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Second-half acceleration and shifted third-party deliveries support higher cash additions. The category split is my estimate based on the disclosed mix and excludes finance leases from the cash measure.

| Short-lived assets, primarily CPUs and GPUs | $36.5B |
| --- | --- |
| Long-lived assets | $11.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $48.0B |

**Short-lived assets, primarily CPUs and GPUs** I allocate about 76% of base cash additions to compute and related components as delayed deliveries arrive.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** I allocate about 24% to facilities and other long-lived assets.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Gemini 4 Argon**

| Net income | $37.0B |
| --- | --- |
| Depreciation, amortization, and other | $13.9B |
| Stock-based compensation expense | $3.25B |
| Deferred income taxes | $2.60B |
| Net working capital and unearned revenue movements | $2.75B |
| Operating cash flow | $59.5B |
| Less capital spending | −$46.5B |
| Free cash flow | $13.0B |

**Net income**

Forecast Q3-FY2027 base-case net income of $37.0 billion from our quarter plan, corresponding to $4.97 diluted EPS across 7,442 million diluted shares.

**Depreciation, amortization, and other**

Forecast $13.9 billion of depreciation, amortization, and other non-cash charges as H1 server additions depreciate.

**Stock-based compensation expense**

Forecast $3.25 billion of stock-based compensation expense.

**Deferred income taxes**

Forecast $2.6 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $2.75 billion net working capital inflow as Q3 seasonally rebounds from Q2 with positive accounts receivable collections ($4.707 billion in Q3-FY2026) and stabilizing unearned revenue.

##### Capital spending — model forecast

Following management's guidance for H2-FY2027 CapEx acceleration from CPUs, GPUs, and delayed third-party capacity deliveries (with third-party leases recorded in finance/operating leases rather than cash PP&E), we forecast Q3-FY2027 cash additions to property and equipment of $46.5 billion, allocated $34.6 billion to Servers, network equipment, and software, $9.8 billion to Buildings and improvements, and $2.1 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $34.6B |
| --- | --- |
| Buildings and improvements | $9.80B |
| Unallocated capital spending | $2.10B |
| Total capital spending | $46.5B |

**Servers, network equipment, and software** Model estimate allocating $34.6 billion (74.4% of Q3-FY2027 cash CapEx) to CPU, GPU, memory, and storage additions as H2 CapEx accelerates.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate allocating $9.8 billion (21.1% of Q3-FY2027 cash CapEx) to owned datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**DeepSeek V4.1 Flash**

| Net income | $35.8B |
| --- | --- |
| Depreciation, amortization, and other | $14.5B |
| Stock-based compensation expense | $3.40B |
| Accounts receivable and unearned revenue, net | $5.00B |
| Other operating items, net | −$1.50B |
| Operating cash flow | $57.2B |
| Less capital spending | −$51.0B |
| Free cash flow | $6.22B |

**Net income**

Base case net income, $4.82 a share; no OpenAI gain or loss assumed.

**Depreciation, amortization, and other**

Rises as short-lived assets enter service.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

March collections of $6 billion less a $1 billion seasonal drawdown.

**Other operating items, net**

A $2.5 billion deferred tax benefit offset by prepayments and cash taxes.

##### Capital spending — model forecast

The March quarter continues the stated second-half acceleration as delayed third-party capacity arrives; the asset split is my estimate, not a disclosed plan.

| Short-lived assets, primarily CPUs and GPUs | $38.2B |
| --- | --- |
| Long-lived assets | $12.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $51.0B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.” “Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

High about 1 chance in 10 of better

Q3-FY2027

**$103B** sales · +4% vs base

**$5.30** EPS · +8% vs base

**$52.4B** Capital spending

**$12.2B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $64.6B |
| --- | --- |
| Less capital spending | −$52.4B |
| Free cash flow | $12.2B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $38.5B |
| --- | --- |
| Depreciation, amortization, and other | $14.7B |
| Stock-based compensation expense | $3.20B |
| Deferred income taxes | $2.50B |
| Accounts receivable, unearned revenue and other working capital | $4.10B |
| Operating cash flow | $63.0B |
| Less capital spending | −$55.0B |
| Free cash flow | $8.00B |

**Net income**

High-case earnings of $5.18 a share.

**Depreciation, amortization, and other**

More capacity in service.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

Assumed.

**Accounts receivable, unearned revenue and other working capital**

Strong collections.

##### Capital spending — model forecast

Delayed third-party capacity arrives in full. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $41.2B |
| --- | --- |
| long-lived assets | $13.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $55.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

**GPT-6.1 Sol**

| Adjusted net income | $43.5B |
| --- | --- |
| Depreciation, amortization, and other | $15.0B |
| Stock-based compensation expense | $3.40B |
| Deferred income taxes | $4.00B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$500M |
| Operating cash flow | $65.4B |
| Less capital spending | −$56.0B |
| Free cash flow | $9.37B |

**Adjusted net income**

Forecast $5.85 adjusted earnings per share on 7.43 billion diluted shares. Assume zero OpenAI remeasurement.

**Depreciation, amortization, and other**

Forecast faster usable-capacity additions raise depreciation.

**Stock-based compensation expense**

Forecast the same existing award pace as the middle.

**Deferred income taxes**

Forecast higher investment increases cash tax timing benefits.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $4 billion and prepayments $2 billion; operating accruals provide $4.5 billion and tax timing $1 billion, with advance revenue approximately unchanged. Better renewals and collections nearly offset growth in operating assets.

##### Capital spending — model forecast

Higher demand requires $56 billion cash investment rather than automatically increasing free cash flow at a fixed spending ratio. Five percent remains unallocated; neither this amount nor the category split is company guidance. Noncash lease commencements are excluded.

| Servers, network equipment, and software | $42.0B |
| --- | --- |
| Buildings and improvements | $11.2B |
| Unallocated capital spending | $2.80B |
| Total capital spending | $56.0B |

**Servers, network equipment, and software** My 75% allocation funds more computing capacity as delayed deliveries catch up faster.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation assumes faster physical completion supporting the high consumption case.

“Buildings and improvements” “Customer demand continues to exceed available supply.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**GLM 5.3**

| Net income, non-GAAP | $37.3B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $18.0B |
| Working capital - unearned revenue, receivables, payables | $8.70B |
| Other operating items | $1.00B |
| Operating cash flow | $65.0B |
| Less capital spending | −$51.0B |
| Free cash flow | $14.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $5.02 on about 7.42 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $14.4 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: stronger billings build unearned revenue.

**Other operating items**

Forecast assumption: small other operating sources.

##### Capital spending — model forecast

In the high case more of the delayed capacity lands and is paid for, lifting capex to about $51 billion, while billings lift operating cash flow more.

| short-lived assets | $38.0B |
| --- | --- |
| long-lived assets | $13.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $51.0B |

**short-lived assets** My forecast assumption: more capacity delivered and paid for on the same company-stated mix.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of a larger cash capex total.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Kimi K3.1 Pro**

| Adjusted net income | $39.1B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $21.0B |
| Deferred taxes and other operating adjustments | $1.50B |
| Operating assets and liabilities | $4.50B |
| Operating cash flow | $66.1B |
| Less capital spending | −$53.0B |
| Free cash flow | $13.1B |

**Adjusted net income**

The high case is $5.25 per share on 7.440 billion diluted shares with no OpenAI adjustment.

**Depreciation, amortization, and stock-based compensation**

Faster deployment raises depreciation and other non-cash add-backs.

**Deferred taxes and other operating adjustments**

Other operating items contribute more in the high case.

**Operating assets and liabilities**

An independently estimated $4.5 billion source of cash as stronger cloud billings and collections increase the third-quarter working-capital benefit. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The high case assumes faster capacity deployment and higher cash spending than the base. Category allocations use the approximate disclosed mix and are not company guidance.

| Short-lived assets, primarily CPUs and GPUs | $40.5B |
| --- | --- |
| Long-lived assets | $12.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $53.0B |

**Short-lived assets, primarily CPUs and GPUs** Higher demand and earlier deliveries increase compute spending; the allocation remains my estimate.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** The remainder supports long-lived datacenter infrastructure.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Gemini 4 Argon**

| Net income | $38.9B |
| --- | --- |
| Depreciation, amortization, and other | $14.2B |
| Stock-based compensation expense | $3.25B |
| Deferred income taxes | $2.80B |
| Net working capital and unearned revenue movements | $3.90B |
| Operating cash flow | $63.0B |
| Less capital spending | −$48.5B |
| Free cash flow | $14.5B |

**Net income**

Forecast high-case Q3-FY2027 net income of $38.85 billion, consistent with $5.22 diluted EPS on 7,442 million diluted shares.

**Depreciation, amortization, and other**

Forecast $14.2 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $3.25 billion of stock-based compensation.

**Deferred income taxes**

Forecast $2.8 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $3.9 billion working capital inflow from strong Q2 holiday collections and commercial billings.

##### Capital spending — model forecast

In the high case, faster server deliveries lift Q3-FY2027 cash CapEx to $48.5 billion ($36.2 billion Servers, network equipment, and software, $10.1 billion Buildings and improvements, and $2.2 billion unallocated).

| Servers, network equipment, and software | $36.2B |
| --- | --- |
| Buildings and improvements | $10.1B |
| Unallocated capital spending | $2.20B |
| Total capital spending | $48.5B |

**Servers, network equipment, and software** Model estimate of $36.2 billion (74.6% of high-case Q3-FY2027 cash CapEx) for accelerated CPU and GPU server deployments.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $10.1 billion (20.8% of high-case Q3-FY2027 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**DeepSeek V4.1 Flash**

| Net income | $39.3B |
| --- | --- |
| Depreciation, amortization, and other | $14.5B |
| Stock-based compensation expense | $3.40B |
| Accounts receivable and unearned revenue, net | $8.00B |
| Other operating items, net | −$100M |
| Operating cash flow | $65.1B |
| Less capital spending | −$51.0B |
| Free cash flow | $14.1B |

**Net income**

High case net income, about $5.30 a share.

**Depreciation, amortization, and other**

Same base; the upside is utilisation.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

Strong collections and bookings.

**Other operating items, net**

A $3 billion deferred tax benefit offset by prepayments and cash taxes.

##### Capital spending — model forecast

Better utilisation of committed capacity lifts cash from operations without raising spending.

| Short-lived assets, primarily CPUs and GPUs | $38.2B |
| --- | --- |
| Long-lived assets | $12.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $51.0B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

#### Three ways the high case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Delayed capacity lands on schedule and is sold immediately.** Customer demand still exceeds available supply. Azure accelerates instead of easing, lifting sales and earnings in the quarter. Cash spending rises with deliveries, but collections of December billings lift operating cash and free cash flow: Q3-FY2027 high cash fcf, average: $12.2B
  Watch A third-quarter Azure outlook at the next report above the second quarter's pace.
  **Model reasoning**
  - **GLM 5.3** Third-party GPU capacity landing in the second half of FY2027 without further slips and being monetized immediately
  - **Kimi K3.1 Pro** Earlier capacity and faster Azure monetization
  - **GPT-6.1 Sol** Faster commissioning and higher fleet utilization
2. **Agents and usage billing spread across the installed base.** E7, Copilot and usage-based billing are already lifting revenue per user. Microsoft 365 accelerates beyond its guided path, adding revenue and earnings within the quarter.
  Watch Microsoft 365 commercial cloud growth at the next report above the guided pace.
  **Model reasoning**
  - **GPT-6.1 Sol** Broader enterprise agent adoption
  - **GLM 5.3** E7 and usage-based Copilot billing pushing Microsoft 365 commercial cloud growth into the 20s
  - **Kimi K3.1 Pro** Stronger AI application adoption and usage-based revenue
3. **Efficiency gains protect margins despite more Azure.** Fleet efficiency let the company serve more customers with the same capacity in the first quarter. Gross margin holds near the second quarter's level, so earnings rise with sales instead of staying flat.
  Watch Microsoft Cloud gross margin at the next report at or above the guided level.
  **Model reasoning**
  - **Kimi K3.1 Pro** Better utilization and product-level margins
  - **GPT-6.1 Sol** Pricing and efficiency protect profit per workload
  - **DeepSeek V4.1 Flash** gross margin holding near 67% as product-level efficiency offsets the mix shift to Azure

Sales would have to step well up from the second quarter, near Q3-FY2027 sales high, average: $103B, with non-GAAP earnings per share near Q3-FY2027 adjusted EPS high, average: $5.30: delayed capacity landing on schedule and selling at once, agents and usage billing spreading through Microsoft 365, and efficiency protecting margins. Sol goes furthest, Q3-FY2027 sales high, sol: $110B with Q3-FY2027 adjusted EPS high, sol: $5.85, because it alone has customers paying for more valuable agents across multiple products, with pricing and efficiency protecting profit per workload.

A quarter in which new capacity lands can jump: Q4-FY2026 sales growth on the quarter before: +8.6%

The six highs run from $99B (GLM 5.3) to $110B (GPT-6.1 Sol).

First sign At the next report, whose date the company has not given: a third-quarter range above the models' middle.

Low about 1 chance in 10 of worse

Q3-FY2027

**$95B** sales · −4% vs base

**$4.50** EPS · −8% vs base

**$48.4B** Capital spending

**$3.91B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $52.3B |
| --- | --- |
| Less capital spending | −$48.4B |
| Free cash flow | $3.91B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $34.4B |
| --- | --- |
| Depreciation, amortization, and other | $14.3B |
| Stock-based compensation expense | $3.20B |
| Deferred income taxes | $1.50B |
| Accounts receivable, unearned revenue and other working capital | $600M |
| Operating cash flow | $54.0B |
| Less capital spending | −$50.0B |
| Free cash flow | $4.00B |

**Net income**

Low-case earnings of $4.62 a share.

**Depreciation, amortization, and other**

Rising with capacity in service.

**Stock-based compensation expense**

Close to recent quarters.

**Deferred income taxes**

Assumed.

**Accounts receivable, unearned revenue and other working capital**

Third-quarter collections of second-quarter billings, at a weaker pace.

##### Capital spending — model forecast

The second-half acceleration in spending is partly delayed in this case.

| short-lived assets, primarily CPUs and GPUs | $37.5B |
| --- | --- |
| long-lived assets | $12.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $50.0B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GPT-6.1 Sol**

| Adjusted net income | $31.9B |
| --- | --- |
| Depreciation, amortization, and other | $14.0B |
| Stock-based compensation expense | $3.40B |
| Deferred income taxes | $3.00B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$7.00B |
| Operating cash flow | $45.3B |
| Less capital spending | −$46.0B |
| Free cash flow | −$651M |

**Adjusted net income**

Forecast $4.30 adjusted earnings per share on 7.43 billion diluted shares; no OpenAI remeasurement is assumed.

**Depreciation, amortization, and other**

Prior purchases continue to enter depreciation despite slower commissioning and sales.

**Stock-based compensation expense**

Forecast existing awards continue vesting.

**Deferred income taxes**

Forecast equipment deductions defer some of the earnings tax provision.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $7 billion, unearned revenue $1 billion and prepayments $2.5 billion; operating accruals supply $3 billion and tax timing $0.5 billion. Cash seasonality improves from December, but weak collections limit the recovery.

##### Capital spending — model forecast

Cash spending rises from December even in the low case because prior commitments arrive. The 5% allocation gap covers other asset categories and payment timing; noncash leases are excluded. No site-level dollar forecast is inferred.

| Servers, network equipment, and software | $34.5B |
| --- | --- |
| Buildings and improvements | $9.20B |
| Unallocated capital spending | $2.30B |
| Total capital spending | $46.0B |

**Servers, network equipment, and software** My 75% allocation reflects some delayed equipment arriving, though below the middle.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation maintains committed physical construction.

“Buildings and improvements” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**GLM 5.3**

| Net income, non-GAAP | $34.6B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $17.4B |
| Working capital - unearned revenue, receivables, payables | $2.00B |
| Other operating items | $1.00B |
| Operating cash flow | $55.0B |
| Less capital spending | −$49.0B |
| Free cash flow | $6.00B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $4.60 on about 7.44 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $13.8 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: weaker billings limit the seasonal recovery.

**Other operating items**

Forecast assumption: small other operating sources.

##### Capital spending — model forecast

In the low case revenue lands lower but the company has said second-half capex accelerates on capacity already contracted, so capex stays at about $49 billion and free cash flow compresses.

| short-lived assets | $36.5B |
| --- | --- |
| long-lived assets | $12.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $49.0B |

**short-lived assets** My forecast assumption: the company-stated mix applied to the committed second-half capex step-up.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of the committed second-half step-up.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Kimi K3.1 Pro**

| Adjusted net income | $33.1B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $18.5B |
| Deferred taxes and other operating adjustments | $500M |
| Operating assets and liabilities | $2.00B |
| Operating cash flow | $54.1B |
| Less capital spending | −$50.0B |
| Free cash flow | $4.11B |

**Adjusted net income**

The low case is $4.45 per share on 7.440 billion diluted shares with no OpenAI adjustment.

**Depreciation, amortization, and stock-based compensation**

Infrastructure depreciation and stock compensation are added back.

**Deferred taxes and other operating adjustments**

Other operating items make a small positive contribution.

**Operating assets and liabilities**

An independently estimated $2.0 billion source of cash from third-quarter collections and liability seasonality, tempered by slower growth. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The company expects total capital expenditures to accelerate in the second fiscal half. I translate that direction into $50 billion of low-case cash additions and allocate them using an approximate disclosed asset-life mix; this is not company category guidance.

| Short-lived assets, primarily CPUs and GPUs | $38.0B |
| --- | --- |
| Long-lived assets | $12.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $50.0B |

**Short-lived assets, primarily CPUs and GPUs** My low-case allocation gives 76% to compute assets as second-half deliveries arrive.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** My forecast assigns the remaining 24% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Gemini 4 Argon**

| Net income | $35.3B |
| --- | --- |
| Depreciation, amortization, and other | $13.6B |
| Stock-based compensation expense | $3.25B |
| Deferred income taxes | $2.40B |
| Net working capital and unearned revenue movements | $1.47B |
| Operating cash flow | $56.0B |
| Less capital spending | −$44.5B |
| Free cash flow | $11.5B |

**Net income**

Forecast low-case Q3-FY2027 net income of $35.28 billion, consistent with $4.74 diluted EPS on 7,442 million diluted shares.

**Depreciation, amortization, and other**

Forecast $13.6 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $3.25 billion of stock-based compensation.

**Deferred income taxes**

Forecast $2.4 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $1.47 billion working capital inflow on lower post-holiday receivables collections.

##### Capital spending — model forecast

In the low case, slower equipment deliveries hold Q3-FY2027 cash CapEx to $44.5 billion ($33.0 billion Servers, network equipment, and software, $9.5 billion Buildings and improvements, and $2.0 billion unallocated).

| Servers, network equipment, and software | $33.0B |
| --- | --- |
| Buildings and improvements | $9.50B |
| Unallocated capital spending | $2.00B |
| Total capital spending | $44.5B |

**Servers, network equipment, and software** Model estimate of $33.0 billion (74.2% of low-case Q3-FY2027 cash CapEx) under continued component and server delivery delays.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $9.5 billion (21.3% of low-case Q3-FY2027 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “Capital expenditures were $45.2 billion, as some third-party capacity deliveries we expected in Q1 were delayed.”

**DeepSeek V4.1 Flash**

| Net income | $31.9B |
| --- | --- |
| Depreciation, amortization, and other | $14.5B |
| Stock-based compensation expense | $3.40B |
| Accounts receivable and unearned revenue, net | $2.50B |
| Other operating items, net | −$2.80B |
| Operating cash flow | $49.5B |
| Less capital spending | −$51.0B |
| Free cash flow | −$1.50B |

**Net income**

Low case net income, about $4.30 a share.

**Depreciation, amortization, and other**

Rises with the fleet.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

March collections, weaker than normal.

**Other operating items, net**

Prepayments and cash taxes.

##### Capital spending — model forecast

Projects are committed, so spending matches the base case and only operating cash flow falls. The asset split is my estimate.

| Short-lived assets, primarily CPUs and GPUs | $38.2B |
| --- | --- |
| Long-lived assets | $12.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $51.0B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

#### Three ways the low case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Delayed third-party capacity slips beyond March.** The company already moved some GPU contracts once, from the first half to the second. Azure misses the step-up the base expects, so sales stall, while depreciation on installed capacity still grows, so earnings fall. Spending commitments keep cash capital spending high, leaving free cash flow thin: Q3-FY2027 low cash fcf, average: $3.9B
  Watch The third-quarter outlook at the next report guiding Azure below the second quarter's pace or naming further delays.
  **Model reasoning**
  - **DeepSeek V4.1 Flash** Azure and Foundry revenue growth slowing to about 40% as delayed third-party GPU-as-a-service capacity slips out of the quarter again
  - **Kimi K3.1 Pro** Delayed capacity and slower Azure consumption
  - **GPT-6.1 Sol** Delayed usable cloud capacity
2. **Paid usage and Copilot renewals come in weaker.** Microsoft 365 growth now leans on revenue per user from premium seats and usage billing. Microsoft 365 fails to accelerate as guided and token prices fall, trimming revenue and earnings within the quarter.
  Watch Microsoft 365 commercial cloud growth at the next report failing to rise above the guided pace.
  **Model reasoning**
  - **GPT-6.1 Sol** Lower paid usage and token pricing
  - **GLM 5.3** Microsoft 365 Copilot and E7 seat growth stalling at enterprise renewals as CIOs scrutinize AI spend
  - **Kimi K3.1 Pro** Lower premium subscription and usage monetization
3. **Component costs and depreciation grow faster than revenue.** Memory and storage prices are rising and depreciation lands before revenue. Gross margin falls further than in the base, so earnings drop more than sales.
  Watch Microsoft Cloud gross margin at the next report below the company's guided level.
  **Model reasoning**
  - **Kimi K3.1 Pro** Higher infrastructure depreciation and component costs
  - **DeepSeek V4.1 Flash** memory and storage component inflation pushing cost of revenue up faster than revenue
  - **Gemini 4 Argon** heavy depreciation on high-cost GPU and memory cohorts compresses gross and operating margins

Sales would have to stall near the second-quarter level, around Q3-FY2027 sales low, average: $95.3B, with non-GAAP earnings per share near Q3-FY2027 adjusted EPS low, average: $4.50: delayed capacity slipping again, weaker paid usage and Copilot renewals, and costs rising ahead of revenue. Sol goes furthest, Q3-FY2027 sales low, sol: $94.0B with Q3-FY2027 adjusted EPS low, sol: $4.30, because it alone adds lower token pricing and customers turning price-sensitive; DeepSeek reaches the same earnings low through operating expense growing at a low-double-digit rate.

Third quarters are seasonally modest: Q3-FY2026 sales growth on the quarter before: +2.0% A flat quarter would still need capacity to slip again.

The six lows run from $94B (GPT-6.1 Sol) to $96B (Gemini 4 Argon).

First sign At the next report, whose date the company has not given: the third-quarter outlook for Azure and total revenue.

#### Watch

The third-quarter outlook at the next report, not yet dated: its total range, the Azure guide against the second quarter, and whether delayed capacity is still due in the second half. A range above the models' middle points higher; another delay or weaker Microsoft 365 growth points lower.

For fiscal 2027, the models expect FY2027 sales middle, average: $396B, growth near last year's pace on Azure and Microsoft 365.

Sales **$396B** +19% on FY2026

*50% range* $389B – $402B *80% range* $383B – $409B

Adjusted EPS **$19.82** $4.89 reported so far

*50% range* $19.24 – $20.41 *80% range* $18.60 – $21.10

Base case

Gross margin **66.1%** 67.9% in FY2026

Operating margin **47.0%** 46.8% in FY2026

#### Investment and cash generation

Base case

Capital spending **$188B**

Free cash flow **$44.2B**

Free cash flow: operating cash flow less capital spending.

- **The models expect FY2027 base capital spending, average: $188B of cash paid for property and equipment, rising each quarter as delayed capacity arrives; the company's own measure adds finance leases. About three-quarters buys servers and chips that earn revenue soon after delivery; the rest builds data centers for later years. Free cash flow, operating cash flow less that spending, falls to FY2027 base free cash flow, average: $44.2B but stays positive, as the company expects. *3 of 6***
  - **Opus 5.5** I put second-quarter cash capital spending at about $45 billion and expect it to rise in the second half, as guided, to about $52 billion and then $58 billion.
  - **Opus 5.5** I forecast operating cash flow of about $233 billion for fiscal 2027 against $195 billion of capital spending, so free cash flow stays positive at about $38 billion.
  - **DeepSeek V4.1 Flash** The promise to stay free cash flow positive is why I do not take the current year below about $34 billion.
  - **GPT-6.1 Sol** Cash capital spending means additions to property and equipment, excluding new noncash finance leases and acquisitions.

The first quarter is in: FY2027 sales reported so far: $92.3B and FY2027 earnings per share reported so far: $4.89. Last year closed at FY2026 sales, reported: $332B. In July the company expected another year of double-digit revenue and operating income growth and said: Even as we invest to meet growing demand, full fiscal year operating margins should be down less than a point.

In October it added that capital spending accelerates in the second half and that it expects to stay free cash flow positive for the year, while Windows sales to PC makers keep falling all year.

The models expect FY2027 sales middle, average: $396B. FY2027 sales middle growth on FY2026, average: +19% Because the first quarter's margin beat plan, most hold the operating margin about flat rather than down: FY2027 base operating margin, average: +47% against FY2026 operating margin, reported: +47%. Gross margin keeps slipping on Azure mix and depreciation.

After the reported first quarter and the forecast second, the year leaves the last 2 quarters of FY2027 sales middle, what the year leaves: $206B for the last two quarters. The models differ on how fast delayed capacity sells, how quickly Copilot lifts Microsoft 365, and how much depreciation weighs.

Cash generation falls: FY2027 base free cash flow, average: $44.2B against FY2026 free cash flow, reported: $67.0B, as FY2027 base capital spending, average: $188B compares with FY2026 capital spending, reported: $116B.

FY2027 adjusted EPS middle, average: $19.82 This is non-GAAP, excluding the impact from investments in OpenAI: the reported first quarter plus three forecast quarters. the last 2 quarters of FY2027 earnings per share middle, what the year leaves: $10.02

#### Sales by quarter

Q4 FY25 $76.4B +18% · margin 68.6%

Q1 FY26 $77.7B +18% · margin 69.0%

Q2 FY26 $81.3B +17% · margin 68.0%

Q3 FY26 $82.9B +18% · margin 67.6%

Q4 FY26 $90.0B +18% · margin 67.2%

Q1 FY27 $92.3B +19% · margin 67.8%

Q2 FY27 $97.4B +20%

Each percent is on the same quarter a year earlier. The forecast rows are the models' average.

#### Calendar 2026 capital spending plan, as revised

April 2026 plan $190B

July 2026 plan $175B

October 2026 plan $170B

**Where each number comes from**

**April 2026 plan**

“For calendar year 2026, we expect to invest roughly $190 billion in capital expenditures, which includes approximately $25 billion from the impact of higher component pricing.”

**July 2026 plan**

“However, the shift from finance to operating leases adjusts our expectation to approximately $175 billion.”

**October 2026 plan**

“Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.”

The company's figure includes finance leases; lease reclassification and delayed third-party capacity lowered it.

#### What it rests on

**Full-year framing**

Another year of double-digit revenue and operating income growth “At the company level, with strong commercial momentum, we continue to expect another fiscal year of double-digit revenue and operating income growth.” July 2026 earnings call

**Operating margin outlook**

Full-year operating margins down less than a point “Even as we invest to meet growing demand, full fiscal year operating margins should be down less than a point.” July 2026 earnings call

**Tax rate**

An effective tax rate of about one-fifth “And finally, we expect our FY27 effective tax rate to be approximately 20%.” July 2026 earnings call

**Cash promise**

Free cash flow to stay positive for the year “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.” October 2026 earnings call

**First-quarter cash**

Operating cash flow up strongly on cloud billings and collections “Cash flow from operations was $58 billion, up 29%, driven by strong cloud billings and collections.” October 2026 earnings call

**Calendar-year spending**

Calendar-year plan lowered because third-party capacity was delayed “Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.” October 2026 earnings call

#### The six models

They agree on growth near last year's pace and a near-flat operating margin. GLM, the lowest, treats the sliding gross margin as 'the main brake on EPS growth relative to revenue growth'. Sol, the highest, holds a margin 'more optimistic than the earlier annual outlook because the September quarter was stronger and efficiencies are monetizing faster'. Sol's range is the widest: low, 'Capacity deliveries disappoint'; high, 'customers pay for more valuable agents across multiple products'.

**Middle** the forecast **50% range** 1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside. **80% range** 1 in 10 chance below this line, 1 in 10 above it. These are the low and high printed by each number.

PricedIn **$396B** $383B – $409B

$390B $400B $410B

##### adjusted EPS

PricedIn **$19.82** $18.60 – $21.10

$19.00 $20.00 $21.00

#### Low and high

Base the middle forecast

Key assumptions

- ****Sales grow near last year's pace, led by Azure and Microsoft 365.** A large contracted backlog and demand above supply support the growth. *2 of 6***
  - **DeepSeek V4.1 Flash** That backlog is the strongest evidence that capacity added over the next year gets sold, so I grow revenue about 19% this year and 15.5% next year rather than assuming an abrupt slowdown.
  - **GLM 5.3** My FY2027 middle - revenue about $391 billion (+18%) and operating margin about 46.7% (down roughly 0.1 point) - sits within that framing, slightly above the midpoint given the Q1 beat.
- ****Operating margin holds about flat instead of falling as guided.** The first quarter's operating margin beat plan on revenue and efficiency gains. *2 of 6***
  - **Opus 5.5** Because the first quarter's 50% operating margin beat expectations, I forecast a fiscal 2027 operating margin of about 47%, roughly flat with fiscal 2026 rather than down.
  - **DeepSeek V4.1 Flash** an operating margin roughly flat rather than the guided slight decline because the first quarter came in 90 basis points better
- ****Gross margin slips on Azure mix and rising depreciation.** The company guides Microsoft Cloud gross margin down as sales shift to Azure. *2 of 6***
  - **DeepSeek V4.1 Flash** That is why I take the total company gross margin from 67.9% last year to about 66.0% this year, 63.8% next year and 62.9% the year after, rather than holding it flat.
  - **GLM 5.3** I model total gross margin sliding from 67.8% in Q1 to about 65% by Q4-FY2027 and roughly 64% by FY2029 - about 100-150 basis points a year - which is the main brake on EPS growth relative to revenue growth.
- ****Operating expense grows far slower than sales.** Headcount fell over fiscal 2026 and the company guided mid to high single-digit growth. *2 of 6***
  - **Opus 5.5** Headcount fell from 228,000 to 223,000. That supports operating expense growing more slowly than revenue, as the guidance for mid to high single-digit growth implies.
  - **GPT-6.1 Sol** Operating spending grows more slowly than sales
- ****Cash spending rises each quarter; free cash flow stays positive but falls.** Delayed deliveries move spending into the second half, and the company promised positive free cash flow. *2 of 6***
  - **Opus 5.5** I put second-quarter cash capital spending at about $45 billion and expect it to rise in the second half, as guided, to about $52 billion and then $58 billion.
  - **DeepSeek V4.1 Flash** The promise to stay free cash flow positive is why I do not take the current year below about $34 billion.

If all of this happens

**$396B** sales

**$19.82** adjusted EPS

**$188B** Capital spending

**$44.2B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $232B |
| --- | --- |
| Less capital spending | −$188B |
| Free cash flow | $44.2B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $147B |
| --- | --- |
| Depreciation, amortization, and other | $54.7B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $10.0B |
| Working capital | $7.88B |
| Operating cash flow | $233B |
| Less capital spending | −$195B |
| Free cash flow | $38.0B |

**Net income**

Reported first-quarter $36.6 billion plus planned quarters and a fourth quarter of about $37.2 billion.

**Depreciation, amortization, and other**

$11.7 billion in the first quarter, rising to about $15.5 billion in the fourth.

**Stock-based compensation expense**

Slightly above fiscal 2026.

**Deferred income taxes**

Including the first quarter's $4.6 billion.

**Working capital**

Growth in billings and unearned revenue, as in fiscal 2026.

##### Capital spending — model forecast

Cash spending by quarter of about $39.4 billion, $45 billion, $52 billion and $58 billion, in line with second-half acceleration. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $146B |
| --- | --- |
| long-lived assets | $48.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $195B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GPT-6.1 Sol**

| Adjusted net income | $152B |
| --- | --- |
| Depreciation, amortization, and other | $55.0B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $13.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$1.00B |
| Operating cash flow | $232B |
| Less capital spending | −$190B |
| Free cash flow | $41.8B |

**Adjusted net income**

Illustrative annual adjusted income equals $20.40 earnings per share times 7.44 billion diluted shares. September's $207 million investment gain is already excluded; assumed future OpenAI remeasurement is zero. This is consistent with the annual earnings forecast rather than adding rounded quarterly earnings per share.

**Depreciation, amortization, and other**

Forecast a larger average server fleet, with depreciation rising through the year despite longer building lives.

**Stock-based compensation expense**

Forecast modest annual growth from the recent compensation expense pace.

**Deferred income taxes**

Forecast cash tax deductions from large equipment purchases defer part of book taxes.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $14 billion, operating prepayments $8 billion and tax settlements $5 billion. Advance billings supply $16 billion and operating payables and accruals $10 billion. These independently chosen movements nearly offset over a full billing cycle; they are not capital-spending finance.

##### Capital spending — model forecast

Cash investment is $190 billion: September $39.367 billion, December $45 billion, March $50 billion and an implied June $55.633 billion. It excludes noncash lease commencements, acquisitions and finance-lease principal payments. The residual 5% is deliberately unallocated among other disclosed asset categories and payment timing. This is my cash estimate, not the company's calendar-year lease-inclusive plan.

| Servers, network equipment, and software | $142B |
| --- | --- |
| Buildings and improvements | $38.0B |
| Unallocated capital spending | $9.50B |
| Total capital spending | $190B |

**Servers, network equipment, and software** My 75% allocation emphasizes computing equipment and storage, not a company forecast of category dollars.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% estimate allows continued datacenter construction alongside much larger equipment purchases.

“Buildings and improvements” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GLM 5.3**

| Net income, non-GAAP (adjusted EPS of about $19.51 on about 7.44 billion diluted shares) | $145B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $67.5B |
| Working capital - unearned revenue, receivables, payables | $25.0B |
| Other operating items | $1.40B |
| Operating cash flow | $239B |
| Less capital spending | −$184B |
| Free cash flow | $55.0B |

**Net income, non-GAAP (adjusted EPS of about $19.51 on about 7.44 billion diluted shares)**

Forecast assumption: FY2027 adjusted net income grows about 13% on 18% revenue growth as gross margin slides about 170 basis points and the tax rate holds near the company's guided 20%.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation rises from $38.5 billion in FY2026 to about $54 billion as the doubled fleet comes into service (servers depreciate over six years), stock-based compensation about $13.5 billion, deferred taxes roughly neutral.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: unearned revenue builds strongly on 73% commercial RPO growth and strong billings, partly offset by receivables growth with revenue; similar to the working-capital source of cash in FY2026.

**Other operating items**

Forecast assumption: small net other operating items, net of non-cash investment gains, consistent with recent years.

##### Capital spending — model forecast

FY2027 cash capital spending of $184 billion (additions to property and equipment) is my forecast, built from the $39.4 billion actually spent in Q1, about $44 billion in Q2 and roughly $49-52 billion per quarter in the second half as the company said spend will accelerate from delayed third-party capacity, CPUs and GPUs. Finance leases (included in the company's capex measure but not in cash additions) are excluded from this cash basis. I allocate the spend across the two categories the company itself describes - short-lived assets (CPUs, GPUs, memory and storage) and long-lived assets - using its stated three-quarters/one-quarter mix as my assumption; the company has not disclosed a dollar split, so the split is my estimate, not company guidance. The allocation is complete, so unallocated capex is zero.

| short-lived assets | $136B |
| --- | --- |
| long-lived assets | $48.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $184B |

**short-lived assets** My forecast assumption: roughly three quarters of FY2027 cash capital spending, in line with the company's stated mix, goes to short-lived assets - CPUs, GPUs, memory and storage; the company did not disclose a dollar split.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of cash capital spending funds long-lived assets - datacenter construction, land and facilities; the company did not disclose a dollar split.

“The remaining spend was for long-lived assets.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Kimi K3.1 Pro**

| Adjusted net income | $146B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $74.0B |
| Deferred taxes and other operating adjustments | $7.88B |
| Operating assets and liabilities | $4.00B |
| Operating cash flow | $232B |
| Less capital spending | −$184B |
| Free cash flow | $47.6B |

**Adjusted net income**

Base adjusted net income combines reported first-quarter adjusted earnings and forecast later quarters, consistent with rounded adjusted EPS of $19.63.

**Depreciation, amortization, and stock-based compensation**

Actual first-quarter add-backs plus rising depreciation and steady stock compensation for the remaining quarters.

**Deferred taxes and other operating adjustments**

Actual first-quarter deferred taxes and investment adjustments plus moderate later contributions.

**Operating assets and liabilities**

An independently estimated $4.0 billion annual source of cash, as cloud billings, collections, and seasonal liabilities modestly exceed operating-asset needs. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Annual cash additions include $39.367 billion reported in the first quarter and forecast cash payments thereafter. Total capital expenditures are higher because they include finance leases. The category allocation is my estimate, not a disclosed company split of cash payments.

| Short-lived assets, primarily CPUs and GPUs | $138B |
| --- | --- |
| Long-lived assets | $46.1B |
| Unallocated capital spending | $0 |
| Total capital spending | $184B |

**Short-lived assets, primarily CPUs and GPUs** I allocate 75% of annual cash additions to compute assets using the latest disclosed mix.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** I allocate the remaining 25% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “Additions to property and equipment (39,367) (19,394)” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**Gemini 4 Argon**

| Net income | $148B |
| --- | --- |
| Depreciation, amortization, and other | $53.2B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes and net investment adjustments | $12.2B |
| Net working capital and unearned revenue movements | $1.13B |
| Operating cash flow | $228B |
| Less capital spending | −$179B |
| Free cash flow | $49.0B |

**Net income**

Forecast FY2027 GAAP net income of $148.472 billion, which equals our base-case non-GAAP adjusted net income of $148.265 billion ($19.92 adjusted diluted EPS across 7,443 million weighted average diluted shares) plus the $207 million after-tax OpenAI net gain recorded in Q1-FY2027.

**Depreciation, amortization, and other**

Forecast FY2027 depreciation, amortization, and other non-cash charges of $53.2 billion (building on $11.744 billion in Q1-FY2027 and rising each quarter as short-lived GPU and CPU server cohorts enter service).

**Stock-based compensation expense**

Forecast FY2027 stock-based compensation of $13.0 billion, up roughly 4.8% from $12.405 billion in FY2026 after $3.134 billion in Q1-FY2027.

**Deferred income taxes and net investment adjustments**

Forecast net positive operating cash flow adjustment of $12.2 billion from deferred income taxes and non-cash investment/derivative remeasurements (following $4.378 billion net in Q1-FY2027).

**Net working capital and unearned revenue movements**

Forecast full-year net working capital inflow of $1.128 billion, as strong full-year unearned revenue billings and collections across Azure and Microsoft 365 commercial cloud slightly exceed accounts receivable growth and operating lease payments.

##### Capital spending — model forecast

We forecast FY2027 cash additions to property and equipment of $179.0 billion (consisting of $39.367 billion reported in Q1-FY2027, $45.0 billion in Q2-FY2027, $46.5 billion in Q3-FY2027, and $48.133 billion in Q4-FY2027), which excludes non-cash finance lease originations. We allocate $133.0 billion to Servers, network equipment, and software and $38.0 billion to Buildings and improvements based on Note 6 asset categories and management's roughly 75%/25% short-lived/long-lived split, leaving $8.0 billion unallocated for land, leasehold improvements, and furniture and equipment, for which management does not provide separate annual cash spend guidance.

| Servers, network equipment, and software | $133B |
| --- | --- |
| Buildings and improvements | $38.0B |
| Unallocated capital spending | $8.00B |
| Total capital spending | $179B |

**Servers, network equipment, and software** Model estimate allocating roughly 74.3% of FY2027 cash property and equipment additions ($133.0 billion of $179.0 billion) to short-lived compute, GPU/CPU servers, memory, storage, and networking equipment, consistent with management's Q1-FY2027 commentary that roughly three-quarters of CapEx is directed to short-lived assets and H2-FY2027 acceleration is led by CPUs and GPUs.

“Servers, network equipment, and software 244,840 215,874” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications. The remaining spend was for long-lived assets.”

**Buildings and improvements** Model estimate allocating $38.0 billion (21.2% of FY2027 cash property and equipment additions) to owned datacenter buildings and facility improvements, informed by Microsoft's $34.6 billion construction commitment entering FY2027 and Q1-FY2027 building cost additions of $11.9 billion.

“Buildings and improvements 194,619 182,749” “As of June 30, 2026, we have committed $34.6 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.” “And cash paid for PP&E was $39.4 billion. Cash flow from operations was $58 billion, up 29%, driven by strong cloud billings and collections. And free cash flow was $18.6 billion, reflecting higher capital expenditures.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**DeepSeek V4.1 Flash**

| Net income | $147B |
| --- | --- |
| Depreciation, amortization, and other | $57.0B |
| Stock-based compensation expense | $13.2B |
| Accounts receivable and unearned revenue, net | $10.0B |
| Other operating items, net | $2.16B |
| Operating cash flow | $229B |
| Less capital spending | −$195B |
| Free cash flow | $34.0B |

**Net income**

Reported net income: first quarter $36.6 billion plus $36.2, $35.8 and $38.0 billion; includes the $207 million OpenAI gain the earnings cases exclude.

**Depreciation, amortization, and other**

Up about 48% from $38.5 billion; the first quarter alone was $11.7 billion.

**Stock-based compensation expense**

About 3.4% of revenue, in line with the $12.4 billion reported last year.

**Accounts receivable and unearned revenue, net**

$16 billion of collections less a $6 billion seasonal drawdown of unearned revenue.

**Other operating items, net**

A $9.0 billion deferred tax benefit and about $1.4 billion from higher long-term liabilities and payables, less about $5.0 billion of prepayments and $3.3 billion of cash taxes, netting about $2.2 billion; the components are my estimates and the total is set so that free cash flow stays modestly positive, as the company says it expects for the year.

##### Capital spending — model forecast

Cash capital spending of $195 billion is the first quarter's $39.4 billion plus about $45, $51 and $60 billion; with finance leases that implies roughly $220 billion of capital expenditures, consistent with about $170 billion for calendar 2026 and an accelerating second half. Nothing is unallocated; the 75/25 split is my estimate, not a disclosed plan, and spending is measured on cash paid for property and equipment so that free cash flow equals operating cash flow less capital spending.

| Short-lived assets, primarily CPUs and GPUs | $146B |
| --- | --- |
| Long-lived assets | $48.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $195B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending, the first-quarter proportion.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.” “And we expect FY27 capital expenditures will grow year over year, given demand signals across our portfolio.”

High about 1 chance in 10 of better

FY2027

**$409B** sales · +3% vs base

**$21.10** EPS · +6% vs base

**$197B** Capital spending

**$52.7B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $250B |
| --- | --- |
| Less capital spending | −$197B |
| Free cash flow | $52.7B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $154B |
| --- | --- |
| Depreciation, amortization, and other | $55.5B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $11.0B |
| Working capital | $9.90B |
| Operating cash flow | $243B |
| Less capital spending | −$205B |
| Free cash flow | $38.0B |

**Net income**

High-case earnings of $20.60 a share.

**Depreciation, amortization, and other**

More capacity in service.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Strong billings.

##### Capital spending — model forecast

Higher demand pulls in more spending. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $154B |
| --- | --- |
| long-lived assets | $51.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $205B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GPT-6.1 Sol**

| Adjusted net income | $171B |
| --- | --- |
| Depreciation, amortization, and other | $57.0B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $15.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | $3.00B |
| Operating cash flow | $259B |
| Less capital spending | −$205B |
| Free cash flow | $54.1B |

**Adjusted net income**

Forecast $23.00 adjusted earnings per share on 7.44 billion diluted shares. September's investment gain is excluded and no future OpenAI remeasurement is assumed.

**Depreciation, amortization, and other**

Forecast faster installations increase depreciable equipment.

**Stock-based compensation expense**

Forecast existing compensation expense is not tightly linked to same-year consumption upside.

**Deferred income taxes**

Forecast faster equipment purchases increase timing differences between cash deductions and book expense.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast $15 billion receivables use, $9 billion operating prepayments and $5 billion tax use, offset by $20 billion advance billings and $12 billion operating accruals. Better renewals and collections provide modest net funding.

##### Capital spending — model forecast

The $205 billion cash estimate includes September actual purchases and more rapid later deliveries. It is not headline capital expenditure inclusive of noncash leases. Five percent remains unallocated rather than claiming a precise company-disclosed split.

| Servers, network equipment, and software | $154B |
| --- | --- |
| Buildings and improvements | $41.0B |
| Unallocated capital spending | $10.2B |
| Total capital spending | $205B |

**Servers, network equipment, and software** My 75% allocation rises with higher paid usage and faster hardware delivery.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation supports earlier physical completion without assigning dollars to a specific project.

“Buildings and improvements” “Customer demand continues to exceed available supply.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GLM 5.3**

| Net income, non-GAAP | $151B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $70.0B |
| Working capital - unearned revenue, receivables, payables | $30.0B |
| Other operating items | $3.00B |
| Operating cash flow | $254B |
| Less capital spending | −$190B |
| Free cash flow | $64.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $20.3 on about 7.44 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: faster fleet additions raise depreciation to about $56 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: stronger billings build unearned revenue faster.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

In the high case stronger demand pulls capacity deliveries forward, so cash capex rises to about $190 billion while billings and collections lift operating cash flow more.

| short-lived assets | $140B |
| --- | --- |
| long-lived assets | $50.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $190B |

**short-lived assets** My forecast assumption: the same company-stated mix applied to higher cash capex as more capacity is delivered and monetized.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of the higher cash capex for datacenter builds.

“The remaining spend was for long-lived assets.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**Kimi K3.1 Pro**

| Adjusted net income | $152B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $78.0B |
| Deferred taxes and other operating adjustments | $9.00B |
| Operating assets and liabilities | $11.0B |
| Operating cash flow | $250B |
| Less capital spending | −$195B |
| Free cash flow | $54.8B |

**Adjusted net income**

The high case is $20.40 per share on approximately 7.443 billion annual diluted shares.

**Depreciation, amortization, and stock-based compensation**

A larger infrastructure fleet and higher stock compensation increase non-cash add-backs.

**Deferred taxes and other operating adjustments**

Deferred taxes and other operating items make a larger positive contribution.

**Operating assets and liabilities**

An independently estimated $11.0 billion annual source of cash from faster cloud billings, collections, and liability growth. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Higher earnings require faster capacity deployment and higher cash investment than the base. The full allocation uses the approximate disclosed asset-life mix and excludes finance leases.

| Short-lived assets, primarily CPUs and GPUs | $146B |
| --- | --- |
| Long-lived assets | $48.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $195B |

**Short-lived assets, primarily CPUs and GPUs** High demand requires more compute spending; I apply the disclosed 75% mix as my allocation.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** The remaining 25% supports long-lived infrastructure.

“The remaining spend was for long-lived assets.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Gemini 4 Argon**

| Net income | $155B |
| --- | --- |
| Depreciation, amortization, and other | $54.5B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes and net investment adjustments | $13.0B |
| Net working capital and unearned revenue movements | $4.63B |
| Operating cash flow | $240B |
| Less capital spending | −$187B |
| Free cash flow | $53.0B |

**Net income**

Forecast high-case FY2027 GAAP net income of $154.873 billion, which equals our high-case non-GAAP adjusted net income of $154.666 billion ($20.78 adjusted diluted EPS across 7,443 million weighted average diluted shares) plus the $207 million after-tax OpenAI net gain recorded in Q1-FY2027.

**Depreciation, amortization, and other**

Forecast $54.5 billion of depreciation and amortization from faster server commissioning.

**Stock-based compensation expense**

Forecast $13.0 billion of stock-based compensation expense.

**Deferred income taxes and net investment adjustments**

Forecast $13.0 billion from deferred tax timing on higher capital additions and earnings.

**Net working capital and unearned revenue movements**

Forecast $4.627 billion net working capital inflow from stronger upfront enterprise cloud billings and collections.

##### Capital spending — model forecast

In the high case, faster equipment deliveries and facility commissioning lift FY2027 cash property and equipment additions to $187.0 billion, allocated $139.0 billion to Servers, network equipment, and software, $39.5 billion to Buildings and improvements, and $8.5 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $139B |
| --- | --- |
| Buildings and improvements | $39.5B |
| Unallocated capital spending | $8.50B |
| Total capital spending | $187B |

**Servers, network equipment, and software** Model estimate of $139.0 billion (~74.3% of high-case cash CapEx) as faster component deliveries and stronger AI demand accelerate GPU and CPU server deployments in H2-FY2027.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $39.5 billion (~21.1% of high-case cash CapEx) for accelerated datacenter shell construction.

“Buildings and improvements 194,619 182,749” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier. In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**DeepSeek V4.1 Flash**

| Net income | $158B |
| --- | --- |
| Depreciation, amortization, and other | $58.0B |
| Stock-based compensation expense | $13.5B |
| Accounts receivable and unearned revenue, net | $15.0B |
| Other operating items, net | $9.70B |
| Operating cash flow | $254B |
| Less capital spending | −$202B |
| Free cash flow | $52.2B |

**Net income**

High case net income, about $21.50 a share.

**Depreciation, amortization, and other**

Slightly more capital in service than the base case.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

Strong collections and bookings.

**Other operating items, net**

A larger deferred tax benefit and higher long-term liabilities.

##### Capital spending — model forecast

Stronger earnings pull through more cash and I raise capital spending modestly; free cash flow still improves. The asset split is my judgment.

| Short-lived assets, primarily CPUs and GPUs | $152B |
| --- | --- |
| Long-lived assets | $50.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $202B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending, with more capacity bought.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

#### Three ways the high case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Capacity is commissioned faster and sold the day it arrives.** Demand exceeds supply, and the company has cut the time to bring new GPUs live. Azure keeps accelerating through the second half, lifting sales and earnings. Spending rises to FY2027 high cash capex, average: $197B, but billings and collections lift operating cash more, so free cash flow reaches FY2027 high cash fcf, average: $52.7B
  Watch Azure growth above guidance at the next report with no new delays named.
  **Model reasoning**
  - **GPT-6.1 Sol** Faster commissioning and higher fleet utilization
  - **GLM 5.3** Third-party GPU capacity landing in the second half of FY2027 without further slips and being monetized immediately
  - **Gemini 4 Argon** Faster-than-expected datacenter dock-to-live commissioning and third-party GPU lease deliveries, unlocking supply-constrained Azure and Foundry demand
2. **Enterprises adopt agents, Copilot and E7 broadly.** Premium seats and usage billing are already the main source of Microsoft 365 growth. Microsoft 365 accelerates beyond the company's expectation, adding higher-value software revenue to each remaining quarter.
  Watch Microsoft 365 commercial cloud growth above the guided pace at the next report.
  **Model reasoning**
  - **GPT-6.1 Sol** Broader enterprise agent adoption
  - **GLM 5.3** E7 and usage-based Copilot billing pushing Microsoft 365 commercial cloud growth into the 20s
  - **Kimi K3.1 Pro** Stronger AI application adoption and usage-based revenue
3. **Custom silicon and fleet efficiency hold margins up.** The company reports efficiency gains across its GPU fleet and more tokens per watt from its own chips. Gross margin falls less than in the base, so earnings grow faster than sales.
  Watch Microsoft Cloud gross margin at or above the guided level at the next report.
  **Model reasoning**
  - **Kimi K3.1 Pro** Utilization and custom silicon offset infrastructure costs, producing resilient margins and faster earnings growth despite higher investment.
  - **GPT-6.1 Sol** Pricing and efficiency protect profit per workload
  - **Gemini 4 Argon** Superior inference cost-per-token reductions from custom Maia 200 and Maia 300 silicon, Cobalt 200 CPUs, and first-party MAI models, lifting Microsoft Cloud gross margins

Sales would need to reach about FY2027 sales high, average: $409B, with non-GAAP earnings per share near FY2027 adjusted EPS high, average: $21.10: capacity commissioned faster and sold at once, broad agent and Copilot adoption, and efficiency gains holding margins. Sol goes furthest, FY2027 sales high, sol: $433B and FY2027 adjusted EPS high, sol: $23.00, because it alone requires durable enterprise demand paying for agents across multiple products, with pricing and efficiency protecting profit per workload. Higher earnings bring more spending: Opus's high case leaves free cash flow at its base level, FY2027 high cash fcf, opus: $38.0B

Fiscal 2026 grew strongly even with Azure short of capacity: FY2026 sales growth: +18%

The six highs run from $398B (GLM 5.3) to $433B (GPT-6.1 Sol).

First sign At the next report, whose date the company has not given: Azure and Microsoft 365 above guidance with cloud gross margin holding.

Low about 1 chance in 10 of worse

FY2027

**$383B** sales · −3% vs base

**$18.60** EPS · −6% vs base

**$183B** Capital spending

**$27.7B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $211B |
| --- | --- |
| Less capital spending | −$183B |
| Free cash flow | $27.7B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $141B |
| --- | --- |
| Depreciation, amortization, and other | $53.5B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $8.00B |
| Working capital | $2.60B |
| Operating cash flow | $218B |
| Less capital spending | −$188B |
| Free cash flow | $30.0B |

**Net income**

Low-case earnings of $18.90 a share, plus the reported first-quarter OpenAI gain.

**Depreciation, amortization, and other**

Up from $38.5 billion in fiscal 2026.

**Stock-based compensation expense**

Slightly above fiscal 2026's $12.4 billion.

**Deferred income taxes**

Assumed.

**Working capital**

Weaker billings growth.

##### Capital spending — model forecast

The first quarter's $39.4 billion of cash spending plus slower additions later in the year. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $141B |
| --- | --- |
| long-lived assets | $47.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $188B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**GPT-6.1 Sol**

| Adjusted net income | $135B |
| --- | --- |
| Depreciation, amortization, and other | $54.0B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes | $12.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$16.0B |
| Operating cash flow | $198B |
| Less capital spending | −$178B |
| Free cash flow | $19.7B |

**Adjusted net income**

Forecast $18.10 adjusted earnings per share times 7.44 billion annual diluted shares. Start after removing September's OpenAI investment gain; future remeasurement is modeled zero, so do not reverse that gain a second time.

**Depreciation, amortization, and other**

The existing investment cycle causes substantial depreciation even if new capacity arrives late.

**Stock-based compensation expense**

Forecast existing awards keep expense relatively stable despite weaker sales.

**Deferred income taxes**

Forecast significant investment-related tax deferral, below the middle.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables consume $18 billion, prepayments $10 billion and tax settlements $6 billion; advance billings provide $10 billion and operating payables and accruals $8 billion. Slower collections and weaker renewals generate a cash use independently of the spending allocation.

##### Capital spending — model forecast

The annual $178 billion includes September cash spending of $39.367 billion. Delivery slippage and late-year restraint lower cash purchases, not an assumed cancellation of every commitment. Five percent remains unallocated; noncash lease commencements are excluded.

| Servers, network equipment, and software | $134B |
| --- | --- |
| Buildings and improvements | $35.6B |
| Unallocated capital spending | $8.90B |
| Total capital spending | $178B |

**Servers, network equipment, and software** My 75% allocation includes September already reported and slower purchases in later quarters.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation reflects ongoing projects despite weaker short-term demand.

“Buildings and improvements” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.” “As of September 30, 2026 and June 30, 2026, purchases of property and equipment remaining in accounts payable were $26.5 billion and $26.7 billion, respectively.”

**GLM 5.3**

| Net income, non-GAAP | $140B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $64.0B |
| Working capital - unearned revenue, receivables, payables | $16.0B |
| Other operating items | $2.00B |
| Operating cash flow | $222B |
| Less capital spending | −$180B |
| Free cash flow | $42.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $18.8 on about 7.45 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $52 billion as some deliveries slip.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: weaker bookings growth means a smaller unearned revenue build.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

In the low case revenue and billings grow more slowly, so cash capex eases to about $180 billion as the company staggers short-lived asset purchases, but spend stays near plan because capacity is contracted against backlog.

| short-lived assets | $133B |
| --- | --- |
| long-lived assets | $47.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $180B |

**short-lived assets** My forecast assumption: the company-stated mix applied to slightly lower cash capex as it staggers short-lived asset purchases when demand softens.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of cash capex for datacenter builds; build timing is flexible.

“The remaining spend was for long-lived assets.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

**Kimi K3.1 Pro**

| Adjusted net income | $140B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $70.0B |
| Deferred taxes and other operating adjustments | $6.00B |
| Operating assets and liabilities | −$1.50B |
| Operating cash flow | $215B |
| Less capital spending | −$190B |
| Free cash flow | $24.8B |

**Adjusted net income**

The low case is $18.85 per share on approximately 7.443 billion annual diluted shares, including the reported first-quarter adjustment.

**Depreciation, amortization, and stock-based compensation**

Actual first-quarter add-backs plus lower subsequent depreciation and compensation than the base case.

**Deferred taxes and other operating adjustments**

Includes actual first-quarter deferred taxes and investment adjustments plus smaller later contributions.

**Operating assets and liabilities**

An independently estimated $1.5 billion annual use of cash: slower collections and operating-asset growth slightly outweigh liability sources after seasonal fourth-quarter billings. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The low case still includes substantial second-half investment despite weaker demand. Cash additions include the reported first quarter and exclude finance leases; the 75%/25% allocation is my estimate.

| Short-lived assets, primarily CPUs and GPUs | $142B |
| --- | --- |
| Long-lived assets | $47.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $190B |

**Short-lived assets, primarily CPUs and GPUs** My forecast allocates 75% of annual cash additions to compute assets.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** My forecast allocates 25% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “Additions to property and equipment (39,367) (19,394)” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Gemini 4 Argon**

| Net income | $143B |
| --- | --- |
| Depreciation, amortization, and other | $52.0B |
| Stock-based compensation expense | $13.0B |
| Deferred income taxes and net investment adjustments | $11.5B |
| Net working capital and unearned revenue movements | −$3.30B |
| Operating cash flow | $216B |
| Less capital spending | −$171B |
| Free cash flow | $45.0B |

**Net income**

Forecast low-case FY2027 GAAP net income of $142.8 billion, consistent with low-case adjusted diluted EPS of $19.15 on 7,443 million diluted shares (plus Q1's $207 million OpenAI net gain).

**Depreciation, amortization, and other**

Forecast $52.0 billion of depreciation and amortization under slower equipment deliveries.

**Stock-based compensation expense**

Forecast $13.0 billion of stock-based compensation expense.

**Deferred income taxes and net investment adjustments**

Forecast $11.5 billion of deferred income tax and investment adjustments.

**Net working capital and unearned revenue movements**

Forecast $3.3 billion net working capital outflow from slower enterprise annuity renewals and elongated customer collection cycles.

##### Capital spending — model forecast

In the low case, equipment delivery delays and moderated short-lived server orders reduce FY2027 cash property and equipment additions to $171.0 billion, allocated $127.0 billion to Servers, network equipment, and software, $36.5 billion to Buildings and improvements, and $7.5 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $127B |
| --- | --- |
| Buildings and improvements | $36.5B |
| Unallocated capital spending | $7.50B |
| Total capital spending | $171B |

**Servers, network equipment, and software** Model estimate of $127.0 billion (~74.3% of low-case cash CapEx), reflecting supply chain delays and paced server orders in response to softer enterprise demand.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $36.5 billion (~21.3% of low-case cash CapEx) as permitting and power bottlenecks slow datacenter construction milestones.

“Buildings and improvements 194,619 182,749” “Capital expenditures were $45.2 billion, as some third-party capacity deliveries we expected in Q1 were delayed.”

**DeepSeek V4.1 Flash**

| Net income | $132B |
| --- | --- |
| Depreciation, amortization, and other | $57.0B |
| Stock-based compensation expense | $13.0B |
| Accounts receivable and unearned revenue, net | $4.00B |
| Other operating items, net | −$9.50B |
| Operating cash flow | $197B |
| Less capital spending | −$192B |
| Free cash flow | $4.60B |

**Net income**

Low case net income, about $17.80 a share.

**Depreciation, amortization, and other**

Up about 48% from $38.5 billion as short-lived assets depreciate over six years.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

Slower collections than the base case and a deeper seasonal drawdown of unearned revenue.

**Other operating items, net**

Prepayments, payables, cash taxes and a small deferred tax benefit.

##### Capital spending — model forecast

I trim spending only slightly because capacity projects are committed; free cash flow therefore nearly disappears. The asset split is my judgment, applied to cash paid for property and equipment.

| Short-lived assets, primarily CPUs and GPUs | $144B |
| --- | --- |
| Long-lived assets | $48.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $192B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at three quarters of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining quarter: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “Given our strong business performance, we expect to continue to remain free cash flow positive in FY27.”

#### Three ways the low case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Capacity keeps slipping and Azure consumption slows.** Third-party deliveries already slipped once, and the company warns demand is hard to forecast. Azure sales fall short through the second half while installed capacity still depreciates, cutting earnings more than sales. Spending is trimmed only a little because projects are committed, so free cash flow falls: FY2027 low cash fcf, average: $27.7B
  Watch Third-quarter Azure guidance at the next report below the second quarter's pace.
  **Model reasoning**
  - **Kimi K3.1 Pro** Delayed capacity and slower Azure consumption
  - **GPT-6.1 Sol** Delayed usable cloud capacity
  - **DeepSeek V4.1 Flash** Azure and Foundry revenue growth slowing to about 40% as delayed third-party GPU-as-a-service capacity slips out of the quarter again
2. **Copilot seats and usage billing monetise more slowly.** Microsoft 365 growth now depends on revenue per user from premium seats and usage billing. Microsoft 365 fails to accelerate through the year, removing some of the growth the base counts on for the second half.
  Watch Microsoft 365 commercial cloud growth stalling at or below the guided pace in the next two reports.
  **Model reasoning**
  - **GLM 5.3** Microsoft 365 Copilot and E7 seat growth stalling at enterprise renewals as CIOs scrutinize AI spend
  - **Kimi K3.1 Pro** Lower premium subscription and usage monetization
  - **GPT-6.1 Sol** Lower paid usage and token pricing
3. **Depreciation, component costs and operating expense outrun sales.** Memory and storage prices are rising, and the doubled fleet depreciates before it earns. Gross margin falls faster than in the base and, in DeepSeek's case, operating expense grows faster too, so earnings growth slows well below sales growth.
  Watch Microsoft Cloud gross margin below the company's guided level at the next report.
  **Model reasoning**
  - **Kimi K3.1 Pro** Higher infrastructure depreciation and component costs
  - **GLM 5.3** Gross margin compression from Azure mix, memory and component cost inflation, and depreciation on the doubled fleet
  - **DeepSeek V4.1 Flash** operating expense growing at a low-double-digit rate as research compute, talent and data costs rise

Sales would have to grow well below last year's pace, to about FY2027 sales low, average: $383B, with non-GAAP earnings per share near FY2027 adjusted EPS low, average: $18.60. Capacity would keep slipping, Copilot and usage billing would fall short, and depreciation and component costs would grow faster than sales while Windows stays weak. DeepSeek goes furthest, FY2027 sales low, deepseek: $375B and FY2027 adjusted EPS low, deepseek: $17.80, because it alone also has operating expense growing at a low-double-digit rate, and it keeps capital spending high, so its free cash flow nearly disappears: FY2027 low cash fcf, deepseek: $4.6B

The company guided operating margins down less than a point and promised positive free cash flow; the low case keeps the cash promise, but only narrowly in some models.

The six lows run from $375B (DeepSeek V4.1 Flash) to $388B (Gemini 4 Argon).

First sign At the next report, whose date the company has not given: Azure guidance for the third quarter and Microsoft Cloud gross margin.

#### Watch

Each quarterly report, not yet dated: Azure growth, Microsoft Cloud gross margin, and cash spending against the second-half acceleration. An operating margin tracking flat for the year points higher; further capacity delays or a weaker Windows business point lower.

For fiscal 2028, the models expect FY2028 sales middle, average: $462B, slower growth as Azure's base grows and depreciation lands in full.

Sales **$462B** +17% on FY2027

*50% range* $444B – $480B *80% range* $426B – $500B

Adjusted EPS **$22.98** +16% on FY2027

*50% range* $21.64 – $24.43 *80% range* $20.21 – $26.04

Base case

Gross margin **65.1%** 66.1% in FY2027

Operating margin **46.5%** 47.0% in FY2027

#### Investment and cash generation

Base case

Capital spending **$219B**

Free cash flow **$53.7B**

Free cash flow: operating cash flow less capital spending.

- **The base has FY2028 base capital spending, average: $219B of cash paid for property and equipment, still rising but more slowly. It buys capacity for the backlog, while a full year of depreciation from the fiscal 2027 build lands in earnings. Free cash flow, operating cash flow less that spending, is FY2028 base free cash flow, average: $53.7B, with a wide spread between models that keep spending climbing and those that see it level off. *3 of 6***
  - **DeepSeek V4.1 Flash** That is the reason the free cash flow path I forecast falls from about $34 billion this year to a trough near $32 billion next year and only then recovers, even though operating income keeps growing.
  - **GLM 5.3** I translate this into cash capital spending (additions to property and equipment) of about $44 billion in Q2, $184 billion in FY2027, rising to roughly $205-218 billion in FY2028-29.
  - **Gemini 4 Argon** followed by operating and free cash flow inflection as utilization rises, custom silicon lowers unit inference cost

The company gives no outlook this far out. What it has disclosed is a large contracted backlog: Commercial remaining performance obligation increased 73% to $677 billion It has also warned that demand for cloud and AI services is hard to forecast and that overbuilding could leave infrastructure underused.

The company says efficiency gains mean each dollar of capital spending can support more revenue over time, and it has moved more future data center leases to operating leases by lengthening building lives.

The models expect FY2028 sales middle, average: $462B. FY2028 sales middle growth on FY2027, average: +17% Growth slows as Azure's base grows. Margins ease as the fiscal 2027 build depreciates in full: FY2028 base gross margin, average: +65% and FY2028 base operating margin, average: +46%.

Cash is where they split most. FY2028 base free cash flow, deepseek: $31.6B FY2028 base free cash flow, gemini: $77.0B DeepSeek keeps spending growing because capacity is still sold before it is built; Gemini expects spending growth to slow as the capacity doubling completes.

On sales, FY2028 sales middle growth, glm: +14% and FY2028 sales middle growth, sol: +20%; Sol's range is much the widest of the six.

FY2028 adjusted EPS middle, average: $22.98 On the non-GAAP basis, FY2028 adjusted EPS middle growth on FY2027, average: +16%: slower operating expense growth offsets a falling gross margin, and no OpenAI gains or losses are forecast.

#### Sales by year

FY2024 $245B

FY2025 $282B +15%

FY2026 $332B +18%

FY2027 $396B +19%

FY2028 $462B +17%

FY2029 $532B +15%

The forecast years are the models' average.

#### Commercial remaining performance obligation by quarter

September 2025 $392B

December 2025 $625B

March 2026 $627B

June 2026 $678B

September 2026 $677B

**Where each number comes from**

**September 2025**

“Microsoft Cloud revenue was $49.1 billion and increased 26% (up 25% in constant currency), and commercial remaining performance obligation increased 51% to $392 billion.”

**December 2025**

“Microsoft Cloud revenue was $51.5 billion and increased 26% (up 24% in constant currency), and commercial remaining performance obligation increased 110% to $625 billion.”

**March 2026**

“Microsoft Cloud revenue was $54.5 billion and increased 29% (up 25% in constant currency), and commercial remaining performance obligation increased 99% to $627 billion.”

**June 2026**

“Microsoft Cloud revenue was $59.3 billion and increased 27%, and commercial remaining performance obligation increased 84% to $678 billion.”

**September 2026**

“Commercial remaining performance obligation increased 73% to $677 billion”

The contracted backlog the later-year forecasts lean on; a large share came from OpenAI commitments.

#### What it rests on

**Commercial backlog**

Commercial remaining performance obligation increased 73% to $677 billion “Commercial remaining performance obligation increased 73% to $677 billion” October 2026 earnings release

**Backlog timing**

Average duration just over two years; under a third due within a year “Our RPO has a weighted average duration of 2.3 years, and roughly 30% will be recognized in revenue in the next 12 months, up 29% year-over-year.” October 2026 earnings call

**OpenAI as customer**

A large share of quarterly revenue came from OpenAI “For the three months ended September 30, 2026, we recorded revenue from commercial arrangements with OpenAI, inclusive of revenue-sharing payments, of $10.0 billion.” First-quarter fiscal 2027 quarterly report

**Building lives**

Data center and office lives extended from 15 to 25 years “Now, before I move to Outlook, effective at the start of FI27, we are extending the estimated useful life of our data centers and office buildings from 15 to 25 years, reflecting our operating history and expected use of these assets.” July 2026 earnings call

**Capital efficiency**

Each dollar of capital spending may support more revenue over time “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.” October 2026 earnings call

#### The six models

All expect growth to slow from fiscal 2027 while staying in double digits. GLM, the lowest, extrapolates slower growth 'as Azure comps stiffen', adding 'This is judgment, not company guidance.' Sol, the highest, holds that 'Fleet efficiencies monetize quickly' alongside 'Premium subscriptions plus usage-based billing'. Sol's range is much wider: its low end has 'lower infrastructure returns and stronger pricing competition'; its high end has 'customers pay for more valuable agents across multiple products'.

**Middle** the forecast **50% range** 1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside. **80% range** 1 in 10 chance below this line, 1 in 10 above it. These are the low and high printed by each number.

PricedIn **$462B** $426B – $500B

$440B $460B $480B $500B

##### adjusted EPS

PricedIn **$22.98** $20.21 – $26.04

$20.00 $22.00 $24.00 $26.00

#### Low and high

Base the middle forecast

Key assumptions

- ****Revenue growth slows but stays in double digits as Azure's base grows.** Large cloud businesses grow more slowly as they get bigger. *2 of 6***
  - **Kimi K3.1 Pro** I used this industry judgment to taper revenue growth from about 19% in fiscal 2027 to 17% and 15.5%
  - **Opus 5.5** I assume revenue growth of about 16% in fiscal 2028 and 14% in fiscal 2029, with earnings per share growing slightly more slowly than revenue.
- ****The contracted backlog converts steadily into revenue.** Much of the commercial backlog is due within the next few years. *2 of 6***
  - **GLM 5.3** This supports my assumption that double-digit revenue growth persists through the forecast horizon even as quarterly Azure rates decelerate.
  - **DeepSeek V4.1 Flash** That backlog is the strongest evidence that capacity added over the next year gets sold, so I grow revenue about 19% this year and 15.5% next year rather than assuming an abrupt slowdown.
- ****Gross margin keeps falling as the fiscal 2027 build depreciates.** Short-lived servers bought now depreciate over six years, and component prices are higher. *2 of 6***
  - **Opus 5.5** This is part of why I expect gross margin to keep falling, to about 64.5% in fiscal 2028 and 63.5% in fiscal 2029.
  - **DeepSeek V4.1 Flash** That is why I take the total company gross margin from 67.9% last year to about 66.0% this year, 63.8% next year and 62.9% the year after, rather than holding it flat.
- ****Operating margin eases only slightly.** Operating expense grows far slower than sales, offsetting most of the gross margin decline. *2 of 6***
  - **Opus 5.5** I let operating margin ease from about 47% in fiscal 2027 to 46% in fiscal 2028 and 45.5% in fiscal 2029.
  - **Kimi K3.1 Pro** Operating margin declines modestly in fiscal 2027, then stabilizes as utilization and efficiency improve.
- ****Capital spending keeps growing, more slowly than in fiscal 2027.** Capacity is still sold before it is built, but the doubling of capacity matures. *2 of 6***
  - **DeepSeek V4.1 Flash** Fiscal 2027 cash spending then works out at about $195 billion, and I carry growth of about 22% and then 6% into the two following years as the buildout matures.
  - **GLM 5.3** I translate this into cash capital spending (additions to property and equipment) of about $44 billion in Q2, $184 billion in FY2027, rising to roughly $205-218 billion in FY2028-29.

If all of this happens

**$462B** sales

**$22.98** adjusted EPS

**$219B** Capital spending

**$53.7B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $272B |
| --- | --- |
| Less capital spending | −$219B |
| Free cash flow | $53.7B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $167B |
| --- | --- |
| Depreciation, amortization, and other | $78.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $8.00B |
| Working capital | $13.4B |
| Operating cash flow | $280B |
| Less capital spending | −$240B |
| Free cash flow | $40.0B |

**Net income**

$22.40 a share on about 7.43 billion shares.

**Depreciation, amortization, and other**

Full year of the fiscal 2027 build.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Billings growth.

##### Capital spending — model forecast

Growth of about 23% from fiscal 2027 as capacity building continues. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $180B |
| --- | --- |
| long-lived assets | $60.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $240B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $182B |
| --- | --- |
| Depreciation, amortization, and other | $75.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $14.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$1.00B |
| Operating cash flow | $284B |
| Less capital spending | −$225B |
| Free cash flow | $59.2B |

**Adjusted net income**

Forecast $24.55 adjusted earnings per share on 7.42 billion diluted shares, with no OpenAI investment remeasurement.

**Depreciation, amortization, and other**

Forecast a full year of depreciation on fiscal 2027 installations plus new purchases; this is my fleet assumption, not guidance.

**Stock-based compensation expense**

Forecast modest compensation growth while sales scale much faster.

**Deferred income taxes**

Forecast continued equipment tax deductions in excess of book depreciation.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $19 billion, operating prepayments $10 billion and tax settlements $6 billion; advance billings provide $20 billion and operating accruals $14 billion. Annual collections remain healthy but do not convert every booked dollar immediately.

##### Capital spending — model forecast

My $225 billion cash investment forecast grows below sales growth as capacity and engineering efficiency improve. This is a judgment, not company guidance. Five percent remains unallocated across other asset categories and payment timing. Noncash leases and acquisitions are excluded.

| Servers, network equipment, and software | $169B |
| --- | --- |
| Buildings and improvements | $45.0B |
| Unallocated capital spending | $11.2B |
| Total capital spending | $225B |

**Servers, network equipment, and software** My 75% allocation reflects growth in computing and storage capacity across cloud and first-party products.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% physical-infrastructure estimate supports the larger fleet; no exact site split is inferred.

“Buildings and improvements” “We continue to align our datacenter locations and server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services.” “Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units and other components.”

**GLM 5.3**

| Net income, non-GAAP (adjusted EPS of about $22.2 on about 7.42 billion diluted shares) | $164B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $91.5B |
| Working capital - unearned revenue, receivables, payables | −$1.00B |
| Other operating items | $0 |
| Operating cash flow | $255B |
| Less capital spending | −$205B |
| Free cash flow | $50.0B |

**Net income, non-GAAP (adjusted EPS of about $22.2 on about 7.42 billion diluted shares)**

Forecast assumption: revenue up about 14% with operating margin roughly stable near 46% and a 20% tax rate.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation steps up to roughly $76 billion as the FY2027 capex wave depreciates over six-year server lives; stock-based compensation about $15.5 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: receivables and payables grow with revenue, offsetting the unearned revenue build.

**Other operating items**

Forecast assumption: roughly neutral other operating items.

##### Capital spending — model forecast

FY2028 cash capital spending of $205 billion is my forecast: growth continues but slows from FY2027's pace as the calendar-2026 wave annualizes. I keep the company's described short-lived/long-lived mix (about three quarters / one quarter) as my allocation assumption; no dollar split has been disclosed. Finance leases are excluded on this cash basis. Unallocated capex is zero because the two categories cover the whole.

| short-lived assets | $150B |
| --- | --- |
| long-lived assets | $55.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $205B |

**short-lived assets** My forecast assumption: about three quarters of cash capital spending continues to go to short-lived assets - compute and storage hardware - as the fleet keeps expanding against backlog.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter funds long-lived assets - new datacenter sites and shells; the company has not disclosed a dollar split.

“The remaining spend was for long-lived assets.” “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion due to the 3P capacity delays noted earlier.” “In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs, and GPUs, as well as the 3P capacity deliveries that shifted to H2.”

**Kimi K3.1 Pro**

| Adjusted net income | $171B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $95.0B |
| Deferred taxes and other operating adjustments | $5.00B |
| Operating assets and liabilities | $3.00B |
| Operating cash flow | $274B |
| Less capital spending | −$210B |
| Free cash flow | $64.2B |

**Adjusted net income**

Base earnings reflect 46.6% operating margin, $1.2 billion of other expense, a 20% tax rate, and adjusted EPS of about $23.01.

**Depreciation, amortization, and stock-based compensation**

The expanding infrastructure fleet drives higher depreciation while stock compensation grows moderately.

**Deferred taxes and other operating adjustments**

Deferred taxes and other items make a moderate annual contribution.

**Operating assets and liabilities**

An independently estimated $3.0 billion annual source of cash, with billings and liability growth slightly exceeding operating-asset investment. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Base cash investment rises more slowly than revenue as capacity efficiency improves, allowing free cash flow to recover. The category split is my estimate extrapolated from the disclosed mix, not a company plan.

| Short-lived assets, primarily CPUs and GPUs | $160B |
| --- | --- |
| Long-lived assets | $50.4B |
| Unallocated capital spending | $0 |
| Total capital spending | $210B |

**Short-lived assets, primarily CPUs and GPUs** I allocate 76% of base cash additions to compute assets as spending remains weighted to short-lived infrastructure.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** I allocate 24% to long-lived datacenter and related infrastructure.

“The remaining spend was for long-lived assets.” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**Gemini 4 Argon**

| Net income | $175B |
| --- | --- |
| Depreciation, amortization, and other | $70.0B |
| Stock-based compensation expense | $13.8B |
| Deferred income taxes | $11.0B |
| Net working capital and unearned revenue movements | $2.24B |
| Operating cash flow | $272B |
| Less capital spending | −$195B |
| Free cash flow | $77.0B |

**Net income**

Forecast base-case FY2028 net income of $174.96 billion, consistent with $23.55 adjusted diluted EPS across 7,430 million diluted shares and zero assumed OpenAI balance-sheet remeasurement impact.

**Depreciation, amortization, and other**

Forecast $70.0 billion of depreciation and amortization reflecting a full year of depreciation on the FY2027 server cohort plus FY2028 additions.

**Stock-based compensation expense**

Forecast $13.8 billion of stock-based compensation (~6% annual growth).

**Deferred income taxes**

Forecast $11.0 billion of deferred income tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $2.24 billion net working capital inflow as unearned revenue growth from enterprise cloud renewals outpaces receivables expansion.

##### Capital spending — model forecast

We forecast FY2028 cash additions to property and equipment growth moderating to 8.9% ($195.0 billion vs $179.0 billion in FY2027) as Microsoft completes its two-year capacity doubling and benefits from more datacenter leases classifying as operating leases under the 25-year useful life policy. We allocate $145.0 billion to Servers, network equipment, and software, $41.0 billion to Buildings and improvements, and $9.0 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $145B |
| --- | --- |
| Buildings and improvements | $41.0B |
| Unallocated capital spending | $9.00B |
| Total capital spending | $195B |

**Servers, network equipment, and software** Model estimate allocating $145.0 billion (74.4% of FY2028 cash CapEx) to GPU, Maia 300, and Cobalt 200 server and networking deployments to convert the multi-year $677 billion commercial RPO backlog.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate allocating $41.0 billion (21.0% of FY2028 cash CapEx) to owned datacenter facility buildouts.

“Buildings and improvements 194,619 182,749” “Currently, the situation is obviously that demand exceeds available supply in a sort of relatively extreme moment. But when you start to think about over the duration, I try to remind people, you know, a lot of the expense, especially you see it in CapEx, you see our CapEx really pivot toward what I would call and do call short-lived assets, which really, right, that's CPUs and GPUs that have relatively shorter lead times.”

**DeepSeek V4.1 Flash**

| Net income | $164B |
| --- | --- |
| Depreciation, amortization, and other | $74.0B |
| Stock-based compensation expense | $16.0B |
| Accounts receivable and unearned revenue, net | $18.0B |
| Other operating items, net | −$2.50B |
| Operating cash flow | $270B |
| Less capital spending | −$238B |
| Free cash flow | $31.6B |

**Net income**

A 45.7% operating margin on $455 billion of revenue, less about $1.5 billion of net other expense and tax at 20.5%.

**Depreciation, amortization, and other**

Up about 30% as two years of capital spending depreciates over six and 25 years.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

$15 billion of collections plus a $3 billion net build in unearned revenue.

**Other operating items, net**

Prepayments and long-term assets partly offset by an $8 billion deferred tax benefit.

##### Capital spending — model forecast

Cash capital spending of $238 billion is my own assumption, about 22% above fiscal 2027, not a company statement: the company has said only that it will continue to invest in capital expenditures to support cloud and AI growth, and has given a growth expectation for fiscal 2027 alone. I extend the ramp because capacity is still sold before it is built and the second-half deliveries that slipped are still to be paid for. The useful-life extension moves more data-centre leases to operating leases, which does not change cash paid for property and equipment. The asset split is my judgment; nothing is unallocated.

| Short-lived assets, primarily CPUs and GPUs | $167B |
| --- | --- |
| Long-lived assets | $71.4B |
| Unallocated capital spending | $0 |
| Total capital spending | $238B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 70% of cash capital spending as completed shells come into service.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 30%: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “We will continue to invest in capital expenditures to support growth in our cloud offerings and our investments in AI training and other infrastructure.”

High about 1 chance in 10 of better

FY2028

**$500B** sales · +8% vs base

**$26.04** EPS · +13% vs base

**$239B** Capital spending

**$67.3B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $307B |
| --- | --- |
| Less capital spending | −$239B |
| Free cash flow | $67.3B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $181B |
| --- | --- |
| Depreciation, amortization, and other | $82.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $10.0B |
| Working capital | $15.7B |
| Operating cash flow | $303B |
| Less capital spending | −$260B |
| Free cash flow | $43.0B |

**Net income**

$24.40 a share.

**Depreciation, amortization, and other**

More capacity.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Strong billings.

##### Capital spending — model forecast

Stronger demand needs more capacity. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $195B |
| --- | --- |
| long-lived assets | $65.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $260B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $233B |
| --- | --- |
| Depreciation, amortization, and other | $80.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $17.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | $7.00B |
| Operating cash flow | $351B |
| Less capital spending | −$265B |
| Free cash flow | $86.0B |

**Adjusted net income**

Forecast $31.40 adjusted earnings per share on 7.42 billion diluted shares, assuming no OpenAI investment remeasurement.

**Depreciation, amortization, and other**

Forecast larger fiscal 2027 and fiscal 2028 capacity installations increase the average depreciating fleet.

**Stock-based compensation expense**

Forecast the same grant expense as the middle, with strong operating leverage.

**Deferred income taxes**

Forecast larger equipment deductions defer more book tax expense.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $20 billion, prepayments $12 billion and taxes $7 billion; stronger advance billings provide $28 billion and operating accruals $18 billion. Cash benefits from renewals rather than from a financing plug.

##### Capital spending — model forecast

The high case requires $265 billion cash investment, not costless growth. I leave 5% unallocated because precise other-category and timing details are unavailable. Noncash leases remain outside cash capital spending.

| Servers, network equipment, and software | $199B |
| --- | --- |
| Buildings and improvements | $53.0B |
| Unallocated capital spending | $13.2B |
| Total capital spending | $265B |

**Servers, network equipment, and software** My 75% allocation buys additional equipment to serve stronger paid demand.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation accelerates physical capacity, not a company-disclosed dollar promise.

“Buildings and improvements” “We continue to align our datacenter locations and server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services.”

**GLM 5.3**

| Net income, non-GAAP | $177B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $97.0B |
| Working capital - unearned revenue, receivables, payables | $6.00B |
| Other operating items | $1.00B |
| Operating cash flow | $281B |
| Less capital spending | −$218B |
| Free cash flow | $63.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $23.9 on about 7.41 billion shares, matching the year +1 high EPS case.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $81 billion on a faster fleet build.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: strong bookings keep building unearned revenue.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

In the high case demand keeps outrunning supply, so cash capex rises to about $218 billion while billings lift operating cash flow more.

| short-lived assets | $160B |
| --- | --- |
| long-lived assets | $58.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $218B |

**short-lived assets** My forecast assumption: higher compute purchases against demand that keeps exceeding supply.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of a larger capex budget.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

**Kimi K3.1 Pro**

| Adjusted net income | $188B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $102B |
| Deferred taxes and other operating adjustments | $7.00B |
| Operating assets and liabilities | $3.50B |
| Operating cash flow | $301B |
| Less capital spending | −$230B |
| Free cash flow | $70.6B |

**Adjusted net income**

The high case is $25.30 per share on approximately 7.435 billion diluted shares.

**Depreciation, amortization, and stock-based compensation**

Faster deployment and earnings growth increase non-cash add-backs.

**Deferred taxes and other operating adjustments**

Other operating items contribute more in the high case.

**Operating assets and liabilities**

An independently estimated $3.5 billion annual source of cash as strong collections and liability growth offset most additional operating-asset investment. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The high case combines stronger monetization with higher capacity investment. Category amounts are my allocation, and cash additions exclude finance leases.

| Short-lived assets, primarily CPUs and GPUs | $175B |
| --- | --- |
| Long-lived assets | $55.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $230B |

**Short-lived assets, primarily CPUs and GPUs** Higher AI demand requires greater compute spending; the 76% allocation is my estimate.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** The remaining 24% supports long-lived infrastructure.

“The remaining spend was for long-lived assets.” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**Gemini 4 Argon**

| Net income | $192B |
| --- | --- |
| Depreciation, amortization, and other | $73.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $12.0B |
| Net working capital and unearned revenue movements | $5.30B |
| Operating cash flow | $296B |
| Less capital spending | −$212B |
| Free cash flow | $84.0B |

**Net income**

Forecast high-case FY2028 net income of $191.7 billion, consistent with $25.85 adjusted diluted EPS across 7,416 million diluted shares.

**Depreciation, amortization, and other**

Forecast $73.0 billion of depreciation and amortization on larger server additions.

**Stock-based compensation expense**

Forecast $14.0 billion of stock-based compensation.

**Deferred income taxes**

Forecast $12.0 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $5.3 billion working capital inflow from rapid E7 and Azure bookings growth.

##### Capital spending — model forecast

In the high case, stronger demand drives $212.0 billion of FY2028 cash property and equipment additions, allocated $158.0 billion to Servers, network equipment, and software, $44.0 billion to Buildings and improvements, and $10.0 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $158B |
| --- | --- |
| Buildings and improvements | $44.0B |
| Unallocated capital spending | $10.0B |
| Total capital spending | $212B |

**Servers, network equipment, and software** Model estimate of $158.0 billion (74.5% of high-case FY2028 cash CapEx) to support surging agentic compute and Foundry token demand.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $44.0 billion (20.8% of high-case FY2028 cash CapEx) for expanded global datacenter construction.

“Buildings and improvements 194,619 182,749” “All up, we added another gigawatt of capacity this quarter and remain on track to roughly double our overall capacity in just two years.”

**DeepSeek V4.1 Flash**

| Net income | $186B |
| --- | --- |
| Depreciation, amortization, and other | $76.0B |
| Stock-based compensation expense | $16.5B |
| Accounts receivable and unearned revenue, net | $26.0B |
| Other operating items, net | $3.00B |
| Operating cash flow | $308B |
| Less capital spending | −$250B |
| Free cash flow | $57.5B |

**Net income**

High case net income, about $25.40 a share.

**Depreciation, amortization, and other**

More capital in service than the base case.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

Strong collections and a bigger net build in unearned revenue.

**Other operating items, net**

A $10 billion deferred tax benefit and higher long-term liabilities, partly offset by prepayments.

##### Capital spending — model forecast

Stronger revenue comes with more capital spending, but operating cash flow grows faster because depreciation is already in the base.

| Short-lived assets, primarily CPUs and GPUs | $175B |
| --- | --- |
| Long-lived assets | $75.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $250B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 70% of cash capital spending with more capacity bought.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 30%.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

#### Three ways the high case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Azure keeps growing fast as capacity doubles and sells out.** Demand still exceeds supply and the backlog is large. Azure revenue grows on top of fiscal 2027's build, lifting sales and earnings. Spending rises to FY2028 high cash capex, average: $239B, but operating cash grows faster, so free cash flow reaches FY2028 high cash fcf, average: $67.3B
  Watch Azure growth holding near the second quarter's pace through fiscal 2027.
  **Model reasoning**
  - **Gemini 4 Argon** Faster-than-expected datacenter dock-to-live commissioning and third-party GPU lease deliveries, unlocking supply-constrained Azure and Foundry demand
  - **Kimi K3.1 Pro** Large contracted backlog converting to revenue
  - **GLM 5.3** Foundry and agentic workloads compounding (Foundry revenue more than tripled year over year)
2. **Agents and usage billing spread across Microsoft 365.** Premium seats and usage billing are already lifting revenue per user. Microsoft 365 growth accelerates instead of fading, adding high-value revenue across the year.
  Watch Microsoft 365 commercial cloud growth accelerating through fiscal 2027 as the company expects.
  **Model reasoning**
  - **GPT-6.1 Sol** Broader enterprise agent adoption
  - **Kimi K3.1 Pro** Stronger AI application adoption and usage-based revenue
3. **Custom silicon and efficiency stop the gross margin slide.** The company reports more tokens per watt from its own chips and efficiency gains across its fleet. Gross margin holds near fiscal 2027's level, so earnings grow faster than sales.
  Watch Microsoft Cloud gross margin steady in fiscal 2027's later reports despite more Azure.
  **Model reasoning**
  - **Gemini 4 Argon** Superior inference cost-per-token reductions from custom Maia 200 and Maia 300 silicon, Cobalt 200 CPUs, and first-party MAI models, lifting Microsoft Cloud gross margins
  - **Kimi K3.1 Pro** Utilization and custom silicon offset infrastructure costs, producing resilient margins and faster earnings growth despite higher investment.
  - **GPT-6.1 Sol** Pricing and efficiency protect profit per workload

Sales would need to reach about FY2028 sales high, average: $500B, with non-GAAP earnings per share near FY2028 adjusted EPS high, average: $26.04: Azure staying strong on a far larger base as capacity doubles and sells out, agents and usage billing spreading across Microsoft 365, and custom silicon stopping the gross margin slide. Sol goes furthest, FY2028 sales high, sol: $570B and FY2028 adjusted EPS high, sol: $31.40, because it alone has customers paying for more valuable agents across multiple products, with pricing and efficiency protecting profit per workload; the other models stop well short.

The high case asks fiscal 2028 to grow nearly as fast as fiscal 2027 on a much larger base, which needs capacity to keep selling out.

The six highs run from $473B (GLM 5.3) to $570B (GPT-6.1 Sol).

First sign Over fiscal 2027's remaining reports: Azure and Microsoft 365 beating guidance with cloud gross margin steady.

Low about 1 chance in 10 of worse

FY2028

**$426B** sales · −8% vs base

**$20.21** EPS · −12% vs base

**$205B** Capital spending

**$31.4B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $236B |
| --- | --- |
| Less capital spending | −$205B |
| Free cash flow | $31.4B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $151B |
| --- | --- |
| Depreciation, amortization, and other | $74.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $6.00B |
| Working capital | $5.00B |
| Operating cash flow | $250B |
| Less capital spending | −$225B |
| Free cash flow | $25.0B |

**Net income**

$20.30 a share on 7.43 billion shares.

**Depreciation, amortization, and other**

Full year of the fiscal 2027 build.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Slower billings growth.

##### Capital spending — model forecast

Spending grows more slowly as demand softens. The split is an assumption, not a plan.

| short-lived assets, primarily CPUs and GPUs | $169B |
| --- | --- |
| long-lived assets | $56.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $225B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $141B |
| --- | --- |
| Depreciation, amortization, and other | $70.0B |
| Stock-based compensation expense | $14.0B |
| Deferred income taxes | $12.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$19.0B |
| Operating cash flow | $218B |
| Less capital spending | −$180B |
| Free cash flow | $38.0B |

**Adjusted net income**

Forecast $19.00 earnings per share on 7.42 billion diluted shares. No investment remeasurement from OpenAI is assumed.

**Depreciation, amortization, and other**

Installed equipment depreciates even if usage disappoints and new purchases are restrained.

**Stock-based compensation expense**

Forecast continuing retention grants and existing vesting.

**Deferred income taxes**

Forecast investment deductions continue but do not increase materially as spending stabilizes.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $23 billion, operating prepayments $11 billion and taxes $6 billion, while advance billings supply $12 billion and operating accruals $9 billion. Slower renewals and collections constrain cash conversion.

##### Capital spending — model forecast

Cash spending is held near fiscal 2027's low case as returns disappoint. The company has not given this annual category plan. I use a coarse 75/20/5 allocation, leaving 5% unallocated rather than inventing site-level forecasts; leases commencing without cash remain excluded.

| Servers, network equipment, and software | $135B |
| --- | --- |
| Buildings and improvements | $36.0B |
| Unallocated capital spending | $9.00B |
| Total capital spending | $180B |

**Servers, network equipment, and software** My 75% estimate allows replacement and selective expansion but fewer speculative orders.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% estimate retains committed buildouts, with flexibility on later phases.

“Buildings and improvements” “Demand for cloud-based and AI products and services is evolving and difficult to forecast. Overestimation of demand or misalignment of capacity investments may result in underutilization of infrastructure and may lead to impairment of assets on our balance sheet. Conversely, demand exceeding available capacity limits our ability to meet customer needs in a timely manner.”

**GLM 5.3**

| Net income, non-GAAP | $153B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $86.0B |
| Working capital - unearned revenue, receivables, payables | −$8.00B |
| Other operating items | $1.00B |
| Operating cash flow | $232B |
| Less capital spending | −$200B |
| Free cash flow | $32.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $20.6 on about 7.43 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $71 billion; the heavy spend already incurred depreciates regardless of demand.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: weaker billings and receivables collection become a use of cash.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

In the low case AI demand digests; the company keeps spending near plan on contracted capacity (it has said short-lived asset purchases are the flexible lever), so cash capex only eases to about $200 billion while operating cash flow falls more.

| short-lived assets | $147B |
| --- | --- |
| long-lived assets | $53.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $200B |

**short-lived assets** My forecast assumption: the company slows short-lived asset purchases first when demand softens, as the CFO described, but contracts already signed keep spend high.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: build timing is staggered but land and shells already committed keep this elevated.

“The remaining spend was for long-lived assets.” “Customers may reduce, delay, or shift AI workloads to competing platforms, on-premises or local deployments, or other alternatives.”

**Kimi K3.1 Pro**

| Adjusted net income | $156B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $88.0B |
| Deferred taxes and other operating adjustments | $3.00B |
| Operating assets and liabilities | −$2.00B |
| Operating cash flow | $245B |
| Less capital spending | −$220B |
| Free cash flow | $25.1B |

**Adjusted net income**

The low case is $21.00 per share on approximately 7.435 billion diluted shares.

**Depreciation, amortization, and stock-based compensation**

Depreciation rises on the installed fleet, with a lower add-back than the base case.

**Deferred taxes and other operating adjustments**

Other operating items make a modest contribution.

**Operating assets and liabilities**

An independently estimated $2.0 billion annual use of cash as slower collections and higher operating assets outweigh liability sources. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Investment remains high despite slower monetization. The 76%/24% split is my forecast allocation from the company's disclosed approximate mix, not company guidance for fiscal 2028.

| Short-lived assets, primarily CPUs and GPUs | $167B |
| --- | --- |
| Long-lived assets | $52.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $220B |

**Short-lived assets, primarily CPUs and GPUs** My low-case forecast assigns 76% of cash additions to compute assets.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** My forecast assigns 24% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “And we expect FY27 capital expenditures will grow year over year, given demand signals across our portfolio.”

**Gemini 4 Argon**

| Net income | $159B |
| --- | --- |
| Depreciation, amortization, and other | $67.0B |
| Stock-based compensation expense | $13.6B |
| Deferred income taxes | $10.0B |
| Net working capital and unearned revenue movements | −$2.50B |
| Operating cash flow | $247B |
| Less capital spending | −$175B |
| Free cash flow | $72.0B |

**Net income**

Forecast low-case FY2028 net income of $158.9 billion, consistent with $21.35 adjusted diluted EPS across 7,442 million diluted shares.

**Depreciation, amortization, and other**

Forecast $67.0 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $13.6 billion of stock-based compensation.

**Deferred income taxes**

Forecast $10.0 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $2.5 billion working capital outflow from slower unearned revenue growth.

##### Capital spending — model forecast

In the low case, management slows short-lived server additions as described on the Q4-FY2026 call, holding FY2028 cash CapEx to $175.0 billion ($130.0 billion Servers, network equipment, and software, $37.0 billion Buildings and improvements, and $8.0 billion unallocated).

| Servers, network equipment, and software | $130B |
| --- | --- |
| Buildings and improvements | $37.0B |
| Unallocated capital spending | $8.00B |
| Total capital spending | $175B |

**Servers, network equipment, and software** Model estimate of $130.0 billion (74.3% of low-case FY2028 cash CapEx) as management exercises its flexibility to pace short-lead-time CPU/GPU server purchases under softer demand.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $37.0 billion (21.1% of low-case FY2028 cash CapEx) as datacenter build timelines are staggered.

“Buildings and improvements 194,619 182,749” “And so if the demand environment changes, you just slow down what is, in fact, the largest component, right, and the driver of COGS.”

**DeepSeek V4.1 Flash**

| Net income | $140B |
| --- | --- |
| Depreciation, amortization, and other | $72.0B |
| Stock-based compensation expense | $15.5B |
| Accounts receivable and unearned revenue, net | $8.00B |
| Other operating items, net | −$9.50B |
| Operating cash flow | $226B |
| Less capital spending | −$230B |
| Free cash flow | −$4.00B |

**Net income**

Low case net income, about $19.00 a share.

**Depreciation, amortization, and other**

Rises with two years of heavy capital spending.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

Slower billings growth.

**Other operating items, net**

Prepayments, payables, cash taxes and a small deferred tax benefit.

##### Capital spending — model forecast

Committed projects still get built even with slower growth, so free cash flow turns slightly negative; that is a feature of the case, not a plug.

| Short-lived assets, primarily CPUs and GPUs | $161B |
| --- | --- |
| Long-lived assets | $69.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $230B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 70% of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 30%.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

#### Three ways the low case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **AI demand digests and Azure growth falls faster than the base.** The company warns overestimating demand could leave infrastructure underused and lead to impairments. Azure adds less revenue on a much larger installed base, so depreciation weighs harder and earnings grow slower than sales. Committed spending keeps cash capital spending high, cutting free cash flow: FY2028 low cash fcf, average: $31.4B
  Watch Azure growth in fiscal 2027's later quarters falling well below the second quarter's pace.
  **Model reasoning**
  - **GLM 5.3** Azure growth decelerating below the guided 49-50% as engineering efficiency gains prove one-off and token pricing falls
  - **GPT-6.1 Sol** Later years suffer lower infrastructure returns and stronger pricing competition.
  - **Kimi K3.1 Pro** This is the main reason the low case has slower cloud growth and weaker margins while the high case has faster monetization.
2. **Copilot and E7 seats stall at enterprise renewals.** Microsoft 365 growth leans on premium seats and usage billing that customers can scrutinise. Microsoft 365 growth falls back, removing part of the software growth that offsets falling cloud margins.
  Watch Microsoft 365 commercial cloud growth slowing through the rest of fiscal 2027.
  **Model reasoning**
  - **GLM 5.3** Microsoft 365 Copilot and E7 seat growth stalling at enterprise renewals as CIOs scrutinize AI spend
  - **Kimi K3.1 Pro** Lower premium subscription and usage monetization
3. **The largest customer slows its spending.** OpenAI supplied a large share of commercial backlog and of first-quarter revenue. Lower consumption from one customer cuts Azure growth and, as Sol notes, can affect collections and funding as well as revenue.
  Watch Revenue from OpenAI in the quarterly reports falling from the first quarter's level.
  **Model reasoning**
  - **GPT-6.1 Sol** It widens the later-year downside because a large customer can alter consumption and funding.
  - **Gemini 4 Argon** where any moderation in frontier training or inference spend or pricing compression across competing models would weigh on Azure growth and token pricing

Sales would grow only modestly, to about FY2028 sales low, average: $426B, with non-GAAP earnings per share near FY2028 adjusted EPS low, average: $20.21, barely above fiscal 2027. AI demand would have to digest: Azure slowing as efficiency gains prove one-off and token prices fall, Copilot renewals stalling, and a large customer spending less, while depreciation on the doubled fleet presses margins. DeepSeek goes furthest on sales, FY2028 sales low, deepseek: $415B, because it alone keeps operating expense growing at a low-double-digit rate and keeps building committed capacity, so its free cash flow turns negative: FY2028 low cash fcf, deepseek: −$4.0B Sol reaches the same earnings low through lower infrastructure returns and stronger pricing competition.

A large share of the commercial backlog came from OpenAI commitments, and the company warns demand is hard to forecast; the low case is a digestion, not a collapse.

The six lows run from $415B (DeepSeek V4.1 Flash) to $438B (Gemini 4 Argon).

First sign Over fiscal 2027's remaining reports: backlog growth outside OpenAI slowing and Azure growth fading.

#### Watch

The fourth-quarter report, when the company has given full-year commentary: any fiscal 2028 view on capital spending, operating margin and backlog. Backlog growth outside OpenAI and a steady Microsoft Cloud gross margin point higher; slower backlog or underused capacity points lower.

For fiscal 2029, the models expect FY2029 sales middle, average: $532B, growth slowing again, with wide disagreement on margins and cash.

Sales **$532B** +15% on FY2028

*50% range* $501B – $563B *80% range* $470B – $597B

Adjusted EPS **$26.57** +16% on FY2028

*50% range* $24.30 – $29.07 *80% range* $22.00 – $31.70

Base case

Gross margin **64.7%** 65.1% in FY2028

Operating margin **46.5%** 46.5% in FY2028

#### Investment and cash generation

Base case

Capital spending **$237B**

Free cash flow **$79.8B**

Free cash flow: operating cash flow less capital spending.

- **The base has FY2029 base capital spending, average: $237B of cash paid for property and equipment, growing far more slowly than in fiscal 2027 as the build matures and more data center leases become operating leases. Spending increasingly replaces the first AI servers as well as adding capacity. Free cash flow, operating cash flow less that spending, recovers to FY2029 base free cash flow, average: $79.8B as depreciation catches up with earlier spending. *2 of 6***
  - **DeepSeek V4.1 Flash** That is the reason the free cash flow path I forecast falls from about $34 billion this year to a trough near $32 billion next year and only then recovers, even though operating income keeps growing.
  - **DeepSeek V4.1 Flash** Fiscal 2027 cash spending then works out at about $195 billion, and I carry growth of about 22% and then 6% into the two following years as the buildout matures.
  - **Gemini 4 Argon** followed by operating and free cash flow inflection as utilization rises, custom silicon lowers unit inference cost

Fiscal 2029 rests almost wholly on the models' judgment: the company gives nothing this far out. The anchors are the contracted backlog, the pace of capacity building, and how far depreciation from today's build squeezes margins.

The company says efficiencies mean each dollar of capital spending can support more revenue over time, and warns that overestimating demand could leave infrastructure underused and lead to impairments. It also has large data center leases not yet commenced.

The models expect FY2029 sales middle, average: $532B. FY2029 sales middle growth on FY2028, average: +15% Growth slows again as Azure's base grows, and earnings grow about as fast as sales.

They split on margins and cash. FY2029 base gross margin, gemini: +66% FY2029 base gross margin, deepseek: +63% Gemini expects custom silicon and utilization to lift margins; DeepSeek expects component costs to keep outgrowing revenue. FY2029 base free cash flow, gemini: $112B FY2029 base free cash flow, deepseek: $55.3B

Sol's range is far wider than the others, stretching from weak returns on infrastructure to broad paid agent adoption.

FY2029 adjusted EPS middle, average: $26.57 On the non-GAAP basis, FY2029 adjusted EPS middle growth on FY2028, average: +16%. Whether earnings outgrow sales depends on the gross margin path the models dispute; no OpenAI gains or losses are forecast.

#### Each model's growth in FY2029

Opus 5.5 +14%

GPT-6.1 Sol +19%

GLM 5.3 +13%

Kimi K3.1 Pro +16%

Gemini 4 Argon +16%

DeepSeek V4.1 Flash +13%

Growth of each model's middle on its own forecast for the year before.

#### What it rests on

**Demand risk**

Overestimating demand may leave infrastructure underused and impaired “Overestimation of demand or misalignment of capacity investments may result in underutilization of infrastructure and may lead to impairment of assets on our balance sheet.” Fiscal 2026 annual report risk factors

**Capital efficiency**

Each dollar of capital spending may support more revenue over time “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.” October 2026 earnings call

**Leases not yet started**

Hundreds of billions of dollars of leases, mostly data centers, still to commence “As of September 30, 2026, we had additional leases, primarily for datacenters, that had not yet commenced of $364.6 billion, with some arrangements subject to certain contractual conditions being met.” First-quarter fiscal 2027 quarterly report

**AI cost uncertainty**

Training, inference, component and energy costs are uncertain “The cost structure for AI products and services is subject to significant uncertainty, including with respect to model training and inference costs, the availability and pricing of components, and energy costs.” Fiscal 2026 annual report risk factors

**Tax dispute**

The IRS seeks a large additional tax payment plus penalties and interest “In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest.” Annual report risk factors

#### The six models

All see growth slowing again; the spread is widest here. GLM, the lowest, rests on 'the historical pattern that hyperscale cloud growth decays slowly on enormous backlogs'. Sol, the highest, counts on 'Deferred capacity begins generating revenue' and 'Premium subscriptions plus usage-based billing'. Sol's range is far wider: its low has 'Later years suffer lower infrastructure returns and stronger pricing competition'; its high has 'customers pay for more valuable agents across multiple products'.

**Middle** the forecast **50% range** 1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside. **80% range** 1 in 10 chance below this line, 1 in 10 above it. These are the low and high printed by each number.

PricedIn **$532B** $470B – $597B

$500B $550B $600B

##### adjusted EPS

PricedIn **$26.57** $22.00 – $31.70

$22.50 $25.00 $27.50 $30.00

#### Low and high

Base the middle forecast

Key assumptions

- ****Revenue growth slows again but stays in double digits.** Azure's base keeps growing larger while the backlog supports demand. *2 of 6***
  - **GLM 5.3** My own extrapolation: revenue growth decelerates from ~18% in FY2027 to ~14% in FY2028 and ~12% in FY2029 as Azure comps stiffen
  - **Opus 5.5** I assume revenue growth of about 16% in fiscal 2028 and 14% in fiscal 2029, with earnings per share growing slightly more slowly than revenue.
- ****Gross margin drifts a little lower on depreciation from earlier builds.** Several years of heavy server purchases depreciate at once. *2 of 6***
  - **Opus 5.5** This is part of why I expect gross margin to keep falling, to about 64.5% in fiscal 2028 and 63.5% in fiscal 2029.
  - **GLM 5.3** I model total gross margin sliding from 67.8% in Q1 to about 65% by Q4-FY2027 and roughly 64% by FY2029 - about 100-150 basis points a year - which is the main brake on EPS growth relative to revenue growth.
- ****Operating expense keeps growing slower than sales, holding operating margin.** The company has kept operating expense growth to mid to high single digits. *2 of 6***
  - **Gemini 4 Argon** Disciplined operating expense growth (mid-to-high single digits annually) and fleet-wide silicon and software throughput efficiencies
  - **Opus 5.5** I let operating margin ease from about 47% in fiscal 2027 to 46% in fiscal 2028 and 45.5% in fiscal 2029.
- ****Capital spending growth slows, so free cash flow recovers.** The capacity build matures while depreciation from earlier spending lifts operating cash. *2 of 6***
  - **DeepSeek V4.1 Flash** That is the reason the free cash flow path I forecast falls from about $34 billion this year to a trough near $32 billion next year and only then recovers, even though operating income keeps growing.
  - **Gemini 4 Argon** followed by operating and free cash flow inflection as utilization rises, custom silicon lowers unit inference cost

If all of this happens

**$532B** sales

**$26.57** adjusted EPS

**$237B** Capital spending

**$79.8B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $317B |
| --- | --- |
| Less capital spending | −$237B |
| Free cash flow | $79.8B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $188B |
| --- | --- |
| Depreciation, amortization, and other | $100B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $8.00B |
| Working capital | $19.3B |
| Operating cash flow | $330B |
| Less capital spending | −$265B |
| Free cash flow | $65.0B |

**Net income**

$25.30 a share on 7.42 billion shares.

**Depreciation, amortization, and other**

Prior builds depreciating.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Billings growth.

##### Capital spending — model forecast

Spending growth slows to about 10%. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $199B |
| --- | --- |
| long-lived assets | $66.2B |
| Unallocated capital spending | $0 |
| Total capital spending | $265B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $218B |
| --- | --- |
| Depreciation, amortization, and other | $95.0B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $15.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$4.00B |
| Operating cash flow | $339B |
| Less capital spending | −$250B |
| Free cash flow | $88.6B |

**Adjusted net income**

Forecast $29.40 adjusted earnings per share on 7.40 billion diluted shares. No OpenAI investment remeasurement is forecast.

**Depreciation, amortization, and other**

Forecast depreciation grows with the installed fleet, including prior fiscal years' large equipment purchases.

**Stock-based compensation expense**

Forecast continued modest grant expense growth relative to the expanding sales base.

**Deferred income taxes**

Forecast continued investment tax timing benefits, with no permanent removal of tax expense.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $25 billion, prepayments $12 billion and taxes $7 billion; advance billings provide $24 billion and operating accruals $16 billion. Collections support growth, but a larger receivable balance and operating prepayments absorb some cash.

##### Capital spending — model forecast

My $250 billion cash purchase estimate grows slower than sales as the prior buildout matures. This judgment does not assume investment stops. Five percent is left unallocated across other asset categories and settlement timing. Noncash leases are excluded, and lease-related operating payments remain reflected in earnings and operating cash assumptions.

| Servers, network equipment, and software | $188B |
| --- | --- |
| Buildings and improvements | $50.0B |
| Unallocated capital spending | $12.5B |
| Total capital spending | $250B |

**Servers, network equipment, and software** My 75% allocation continues equipment-heavy expansion while assuming better output per investment dollar.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% estimate sustains the physical datacenter network rather than claiming a disclosed fiscal 2029 construction budget.

“Buildings and improvements” “We continue to align our datacenter locations and server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services.”

**GLM 5.3**

| Net income, non-GAAP (adjusted EPS of about $24.9 on about 7.40 billion diluted shares) | $184B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $108B |
| Working capital - unearned revenue, receivables, payables | −$5.00B |
| Other operating items | $4.30B |
| Operating cash flow | $292B |
| Less capital spending | −$218B |
| Free cash flow | $74.0B |

**Net income, non-GAAP (adjusted EPS of about $24.9 on about 7.40 billion diluted shares)**

Forecast assumption: revenue up about 12% with operating margin near 46% and a 20% tax rate.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation reaches roughly $92 billion as the FY2027-28 capex waves fully annualize; stock-based compensation about $16.5 billion.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: working capital grows broadly with revenue.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

FY2029 cash capital spending of $218 billion is my forecast: growth flattens relative to FY2028 as the first AI-fleet vintages reach end of life and replacement cycles begin. Allocation across the company's two described categories remains my assumption on the stated mix; no dollar split has been disclosed. Unallocated capex is zero.

| short-lived assets | $156B |
| --- | --- |
| long-lived assets | $62.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $218B |

**short-lived assets** My forecast assumption: fleet replacement and growth keep short-lived assets - compute and storage - the majority of spend, though their share eases slightly as more sites complete.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: a rising share funds long-lived assets - completed datacenter capacity; the company has not disclosed a dollar split.

“The remaining spend was for long-lived assets.” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Kimi K3.1 Pro**

| Adjusted net income | $199B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $110B |
| Deferred taxes and other operating adjustments | $5.00B |
| Operating assets and liabilities | $2.00B |
| Operating cash flow | $316B |
| Less capital spending | −$232B |
| Free cash flow | $84.1B |

**Adjusted net income**

Base earnings reflect 46.9% operating margin, $1.3 billion of other expense, a 20% tax rate, and adjusted EPS of about $26.80.

**Depreciation, amortization, and stock-based compensation**

Depreciation continues to grow with the fleet, and stock compensation rises moderately.

**Deferred taxes and other operating adjustments**

Deferred taxes and other items make a moderate contribution.

**Operating assets and liabilities**

An independently estimated $2.0 billion annual source of cash from billings, collections, and liability growth after operating-asset needs. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

Cash investment grows more slowly than operating cash flow as efficiency and utilization improve, lifting free cash flow. The allocation is my estimate from company-disclosed categories, not a published fiscal 2029 split.

| Short-lived assets, primarily CPUs and GPUs | $176B |
| --- | --- |
| Long-lived assets | $55.7B |
| Unallocated capital spending | $0 |
| Total capital spending | $232B |

**Short-lived assets, primarily CPUs and GPUs** I assign 76% of base cash additions to compute assets, consistent with the recent disclosed asset-life mix.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** I assign 24% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**Gemini 4 Argon**

| Net income | $206B |
| --- | --- |
| Depreciation, amortization, and other | $84.0B |
| Stock-based compensation expense | $14.6B |
| Deferred income taxes | $10.0B |
| Net working capital and unearned revenue movements | $3.80B |
| Operating cash flow | $318B |
| Less capital spending | −$206B |
| Free cash flow | $112B |

**Net income**

Forecast base-case FY2029 net income of $205.6 billion, consistent with $27.75 adjusted diluted EPS across 7,410 million diluted shares.

**Depreciation, amortization, and other**

Forecast $84.0 billion of depreciation and amortization on the expanded installed server and datacenter base.

**Stock-based compensation expense**

Forecast $14.6 billion of stock-based compensation (~5.8% YoY growth).

**Deferred income taxes**

Forecast $10.0 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $3.8 billion net working capital inflow from growing recurring cloud and agent subscriptions.

##### Capital spending — model forecast

We forecast FY2029 cash additions to property and equipment of $206.0 billion (+5.6% YoY, declining to 38.1% of revenue from 45.1% in FY2027), allocated $154.0 billion to Servers, network equipment, and software, $43.0 billion to Buildings and improvements, and $9.0 billion unallocated for land, leasehold improvements, and furniture and equipment.

| Servers, network equipment, and software | $154B |
| --- | --- |
| Buildings and improvements | $43.0B |
| Unallocated capital spending | $9.00B |
| Total capital spending | $206B |

**Servers, network equipment, and software** Model estimate allocating $154.0 billion (74.8% of FY2029 cash CapEx) to ongoing fleet expansion and server refresh cycles, with higher tokens-per-watt from custom Maia and Cobalt silicon moderating capital intensity.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate allocating $43.0 billion (20.9% of FY2029 cash CapEx) to owned datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**DeepSeek V4.1 Flash**

| Net income | $185B |
| --- | --- |
| Depreciation, amortization, and other | $85.0B |
| Stock-based compensation expense | $17.5B |
| Accounts receivable and unearned revenue, net | $22.0B |
| Other operating items, net | −$2.50B |
| Operating cash flow | $307B |
| Less capital spending | −$252B |
| Free cash flow | $55.3B |

**Net income**

A 45.6% operating margin on $515 billion of revenue, about $1.7 billion of net other expense and tax at 20.5%.

**Depreciation, amortization, and other**

Three years of heavy capital spending now depreciating over six and 25 years.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

$18 billion of collections plus a $4 billion net build in unearned revenue.

**Other operating items, net**

Prepayments and long-term assets partly offset by an $8 billion deferred tax benefit.

##### Capital spending — model forecast

Capital spending of $252 billion is cash paid for property and equipment, up about 6% as the buildout matures and more of the bill moves to operating leases; depreciation growth is why free cash flow recovers.

| Short-lived assets, primarily CPUs and GPUs | $171B |
| --- | --- |
| Long-lived assets | $80.6B |
| Unallocated capital spending | $0 |
| Total capital spending | $252B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 68% of cash capital spending; the long-lived share keeps rising.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 32%: land, shells and fit-out.

“The remaining spend was for long-lived assets.” “We will continue to invest in capital expenditures to support growth in our cloud offerings and our investments in AI training and other infrastructure.”

High about 1 chance in 10 of better

FY2029

**$597B** sales · +12% vs base

**$31.70** EPS · +19% vs base

**$266B** Capital spending

**$102B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $368B |
| --- | --- |
| Less capital spending | −$266B |
| Free cash flow | $102B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $214B |
| --- | --- |
| Depreciation, amortization, and other | $106B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $10.0B |
| Working capital | $16.3B |
| Operating cash flow | $361B |
| Less capital spending | −$290B |
| Free cash flow | $71.0B |

**Net income**

$28.80 a share.

**Depreciation, amortization, and other**

More capacity.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Strong billings.

##### Capital spending — model forecast

Demand keeps rising. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $218B |
| --- | --- |
| long-lived assets | $72.5B |
| Unallocated capital spending | $0 |
| Total capital spending | $290B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $315B |
| --- | --- |
| Depreciation, amortization, and other | $110B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $20.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | $6.00B |
| Operating cash flow | $466B |
| Less capital spending | −$320B |
| Free cash flow | $146B |

**Adjusted net income**

Forecast $42.60 adjusted earnings per share on 7.40 billion diluted shares, with assumed-zero OpenAI investment remeasurement.

**Depreciation, amortization, and other**

Forecast sustained high installation volumes enlarge the depreciable fleet.

**Stock-based compensation expense**

Forecast strong revenue growth without a proportionate acceleration of grants.

**Deferred income taxes**

Forecast larger cash equipment purchases produce greater tax timing benefits.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $28 billion, operating prepayments $15 billion and taxes $9 billion; advance billings provide $36 billion and operating accruals $22 billion. Strong renewals and collections provide modest net cash relative to the much larger business.

##### Capital spending — model forecast

The $320 billion cash investment estimate is much higher than the middle because the revenue scenario requires more capacity. The 75/20/5 allocation is a coarse analyst estimate. Five percent remains unallocated; no future company guidance or project-level split is asserted.

| Servers, network equipment, and software | $240B |
| --- | --- |
| Buildings and improvements | $64.0B |
| Unallocated capital spending | $16.0B |
| Total capital spending | $320B |

**Servers, network equipment, and software** My 75% allocation supports very strong consumption and substantial equipment replacement, rather than treating the high case as asset-light.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation expands physical capacity to support the stronger revenue scenario.

“Buildings and improvements” “We continue to align our datacenter locations and server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services.”

**GLM 5.3**

| Net income, non-GAAP | $203B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $118B |
| Working capital - unearned revenue, receivables, payables | −$4.00B |
| Other operating items | $1.00B |
| Operating cash flow | $318B |
| Less capital spending | −$232B |
| Free cash flow | $86.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $27.5 on about 7.39 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $100 billion on a larger fleet.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: working capital grows with revenue.

**Other operating items**

Forecast assumption: roughly neutral other operating items.

##### Capital spending — model forecast

In the high case the buildout keeps compounding; cash capex rises to about $232 billion, but operating cash flow grows faster.

| short-lived assets | $166B |
| --- | --- |
| long-lived assets | $66.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $232B |

**short-lived assets** My forecast assumption: compute purchases stay the majority against demand exceeding supply.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: the remaining quarter of a larger budget.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

**Kimi K3.1 Pro**

| Adjusted net income | $229B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $120B |
| Deferred taxes and other operating adjustments | $7.00B |
| Operating assets and liabilities | −$1.00B |
| Operating cash flow | $355B |
| Less capital spending | −$260B |
| Free cash flow | $94.8B |

**Adjusted net income**

The high case is $30.80 per share on approximately 7.427 billion diluted shares.

**Depreciation, amortization, and stock-based compensation**

A larger revenue and infrastructure base raises depreciation and other non-cash add-backs.

**Deferred taxes and other operating adjustments**

Other operating items contribute more in the high case.

**Operating assets and liabilities**

An independently estimated $1.0 billion annual use of cash because very rapid growth requires additional operating assets that slightly exceed collection and liability benefits. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The high case pairs exceptional monetization with the highest investment. Cash additions exclude finance leases, and the full category allocation is my estimate rather than a company forecast.

| Short-lived assets, primarily CPUs and GPUs | $198B |
| --- | --- |
| Long-lived assets | $62.4B |
| Unallocated capital spending | $0 |
| Total capital spending | $260B |

**Short-lived assets, primarily CPUs and GPUs** Stronger AI demand drives more compute spending; the 76% category allocation is my estimate.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** The remaining 24% supports long-lived datacenter infrastructure.

“The remaining spend was for long-lived assets.” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**Gemini 4 Argon**

| Net income | $231B |
| --- | --- |
| Depreciation, amortization, and other | $88.0B |
| Stock-based compensation expense | $14.9B |
| Deferred income taxes | $11.0B |
| Net working capital and unearned revenue movements | $6.90B |
| Operating cash flow | $352B |
| Less capital spending | −$229B |
| Free cash flow | $123B |

**Net income**

Forecast high-case FY2029 net income of $231.2 billion, consistent with $31.30 adjusted diluted EPS across 7,387 million diluted shares.

**Depreciation, amortization, and other**

Forecast $88.0 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $14.9 billion of stock-based compensation.

**Deferred income taxes**

Forecast $11.0 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $6.9 billion working capital inflow from strong upfront enterprise billings.

##### Capital spending — model forecast

In the high case, sustained 20%+ top-line growth supports $229.0 billion of FY2029 cash CapEx ($172.0 billion Servers, network equipment, and software, $47.0 billion Buildings and improvements, and $10.0 billion unallocated).

| Servers, network equipment, and software | $172B |
| --- | --- |
| Buildings and improvements | $47.0B |
| Unallocated capital spending | $10.0B |
| Total capital spending | $229B |

**Servers, network equipment, and software** Model estimate of $172.0 billion (75.1% of high-case FY2029 cash CapEx) for expanded AI server capacity.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $47.0 billion (20.5% of high-case FY2029 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “And as we continue to improve the efficiencies of our infrastructure, each dollar of CapEx has the potential to support more revenue and higher returns over time.”

**DeepSeek V4.1 Flash**

| Net income | $214B |
| --- | --- |
| Depreciation, amortization, and other | $88.0B |
| Stock-based compensation expense | $18.0B |
| Accounts receivable and unearned revenue, net | $32.0B |
| Other operating items, net | $5.00B |
| Operating cash flow | $357B |
| Less capital spending | −$268B |
| Free cash flow | $89.0B |

**Net income**

High case net income, about $29.20 a share (the year +2 high case on the form), on about 7,330 million diluted shares.

**Depreciation, amortization, and other**

More capital in service than the base case.

**Stock-based compensation expense**

About 3.4% of revenue.

**Accounts receivable and unearned revenue, net**

Strong collections and a bigger net build in unearned revenue.

**Other operating items, net**

A $12 billion deferred tax benefit and higher long-term liabilities, partly offset by prepayments.

##### Capital spending — model forecast

Stronger revenue, better operating leverage and more capital spending, with operating cash flow growing faster than capital spending.

| Short-lived assets, primarily CPUs and GPUs | $182B |
| --- | --- |
| Long-lived assets | $85.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $268B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 68% of cash capital spending with more capacity bought.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 32%.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

#### Three ways the high case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Agents become a broad paid layer across products.** Premium seats and usage billing are already raising Microsoft 365 revenue per user. Software revenue grows faster than in the base, lifting sales and earnings together. Spending rises to FY2029 high cash capex, average: $266B, but cash from operations grows faster, so free cash flow reaches FY2029 high cash fcf, average: $102B
  Watch Microsoft 365 commercial cloud growth accelerating in fiscal 2028.
  **Model reasoning**
  - **GPT-6.1 Sol** Broader enterprise agent adoption
  - **Kimi K3.1 Pro** Stronger AI application adoption and usage-based revenue
2. **Custom silicon lifts margins as utilization rises.** The company reports more tokens per watt from its own chips. Gross margin recovers instead of drifting lower, so earnings grow faster than sales.
  Watch Microsoft Cloud gross margin rising in fiscal 2028 despite more Azure.
  **Model reasoning**
  - **Gemini 4 Argon** followed by operating and free cash flow inflection as utilization rises, custom silicon lowers unit inference cost
  - **Kimi K3.1 Pro** Utilization and custom silicon offset infrastructure costs, producing resilient margins and faster earnings growth despite higher investment.
3. **The backlog converts and capacity keeps selling out.** The commercial backlog is large and contracted. Contracted revenue arrives on schedule and new capacity is sold as it lands, keeping Azure growth high.
  Watch Backlog continuing to grow outside OpenAI through fiscal 2028.
  **Model reasoning**
  - **Kimi K3.1 Pro** Large contracted backlog converting to revenue
  - **GLM 5.3** so I do not discount the backlog
  - **Gemini 4 Argon** powered by Azure and Microsoft 365 cloud demand converting the $677 billion commercial backlog into revenue

Sales would need about FY2029 sales high, average: $597B, with non-GAAP earnings per share near FY2029 adjusted EPS high, average: $31.70: agents becoming a broad paid layer across products, custom silicon lifting margins as utilization rises, and the backlog converting while capacity keeps selling out. Sol goes furthest, FY2029 sales high, sol: $724B and FY2029 adjusted EPS high, sol: $42.60, because it alone compounds customers paying for more valuable agents across multiple products, with pricing and efficiency protecting profit per workload, for two more years; the other models stop near the average.

The high case needs fiscal 2029 growth close to fiscal 2027's pace on a far larger base, which no model but Sol fully assumes.

The six highs run from $542B (GLM 5.3) to $724B (GPT-6.1 Sol).

First sign Over fiscal 2028's reports: Microsoft Cloud gross margin rising while Azure growth holds.

Low about 1 chance in 10 of worse

FY2029

**$470B** sales · −11% vs base

**$22.00** EPS · −17% vs base

**$217B** Capital spending

**$45.8B** Free cash flow

**FCF walk and spending detail**

Forecast dollars. Free cash flow is operating cash flow less capital spending.

| Operating cash flow | $262B |
| --- | --- |
| Less capital spending | −$217B |
| Free cash flow | $45.8B |

Each model’s earnings-to-cash walk follows. Components retain that model’s labels and assumptions.

**Opus 5.5**

| Net income | $161B |
| --- | --- |
| Depreciation, amortization, and other | $92.0B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $5.00B |
| Working capital | $4.00B |
| Operating cash flow | $277B |
| Less capital spending | −$240B |
| Free cash flow | $37.0B |

**Net income**

$21.70 a share on 7.42 billion shares.

**Depreciation, amortization, and other**

Prior builds depreciating.

**Stock-based compensation expense**

Assumed.

**Deferred income taxes**

Assumed.

**Working capital**

Slow growth.

##### Capital spending — model forecast

Spending grows only about 7%, from $225 billion in the fiscal 2028 low case to $240 billion, as demand cools. The split is an assumption.

| short-lived assets, primarily CPUs and GPUs | $180B |
| --- | --- |
| long-lived assets | $60.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $240B |

**short-lived assets, primarily CPUs and GPUs** My assumption of three-quarters.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** The remaining quarter, my assumption.

“The remaining spend was for long-lived assets. This quarter, finance leases were $7.4 billion.” “Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**GPT-6.1 Sol**

| Adjusted net income | $144B |
| --- | --- |
| Depreciation, amortization, and other | $85.0B |
| Stock-based compensation expense | $15.0B |
| Deferred income taxes | $11.0B |
| Collections, advance billings, operating accruals, prepayments and tax payments | −$24.0B |
| Operating cash flow | $231B |
| Less capital spending | −$175B |
| Free cash flow | $56.3B |

**Adjusted net income**

Forecast $19.50 adjusted earnings per share on 7.40 billion diluted shares, excluding assumed-zero future OpenAI remeasurement.

**Depreciation, amortization, and other**

Depreciation from prior investment remains heavy even after cash purchases are reduced.

**Stock-based compensation expense**

Forecast continued employee awards despite sluggish revenue and earnings.

**Deferred income taxes**

Tax deferrals moderate as cash investment slows relative to book depreciation.

**Collections, advance billings, operating accruals, prepayments and tax payments**

Forecast receivables use $26 billion, operating prepayments $12 billion and tax settlements $7 billion; advance billings provide only $12 billion and operating accruals $9 billion. Weaker contract renewals and slower collection persist.

##### Capital spending — model forecast

The low case cuts cash investment to $175 billion after years of disappointing returns. It does not assume zero replacement needs or automatic cancellation of long-term leases. The 5% allocation gap is explicit; no exact company split is claimed.

| Servers, network equipment, and software | $131B |
| --- | --- |
| Buildings and improvements | $35.0B |
| Unallocated capital spending | $8.75B |
| Total capital spending | $175B |

**Servers, network equipment, and software** My 75% allocation shifts toward replacing and selectively expanding the fleet as returns weaken.

“Servers, network equipment, and software”

**Buildings and improvements** My 20% allocation finishes committed phases while slowing discretionary expansion.

“Buildings and improvements” “Demand for cloud-based and AI products and services is evolving and difficult to forecast. Overestimation of demand or misalignment of capacity investments may result in underutilization of infrastructure and may lead to impairment of assets on our balance sheet. Conversely, demand exceeding available capacity limits our ability to meet customer needs in a timely manner.”

**GLM 5.3**

| Net income, non-GAAP | $167B |
| --- | --- |
| Depreciation, amortization, stock-based compensation and deferred taxes | $99.0B |
| Working capital - unearned revenue, receivables, payables | −$6.00B |
| Other operating items | $2.00B |
| Operating cash flow | $262B |
| Less capital spending | −$215B |
| Free cash flow | $47.0B |

**Net income, non-GAAP**

Forecast assumption: adjusted EPS near $22.4 on about 7.42 billion shares.

**Depreciation, amortization, stock-based compensation and deferred taxes**

Forecast assumption: depreciation about $84 billion; the fleet already bought depreciates regardless of demand.

**Working capital - unearned revenue, receivables, payables**

Forecast assumption: weaker billings make working capital a use of cash.

**Other operating items**

Forecast assumption: modest other operating sources.

##### Capital spending — model forecast

In the low case growth spending slows but the replacement cycle of short-lived assets bought in FY2026-27 keeps cash capex near $215 billion, squeezing free cash flow.

| short-lived assets | $154B |
| --- | --- |
| long-lived assets | $61.0B |
| Unallocated capital spending | $0 |
| Total capital spending | $215B |

**short-lived assets** My forecast assumption: replacement of the first AI fleet vintages keeps short-lived asset spend high even if growth spending slows.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**long-lived assets** My forecast assumption: sites already under construction complete, keeping long-lived asset spend elevated.

“The remaining spend was for long-lived assets.” “Customers may reduce, delay, or shift AI workloads to competing platforms, on-premises or local deployments, or other alternatives.”

**Kimi K3.1 Pro**

| Adjusted net income | $173B |
| --- | --- |
| Depreciation, amortization, and stock-based compensation | $100B |
| Deferred taxes and other operating adjustments | $3.00B |
| Operating assets and liabilities | −$1.00B |
| Operating cash flow | $275B |
| Less capital spending | −$245B |
| Free cash flow | $30.0B |

**Adjusted net income**

The low case is $23.30 per share on approximately 7.427 billion diluted shares.

**Depreciation, amortization, and stock-based compensation**

The installed infrastructure fleet produces a large depreciation add-back.

**Deferred taxes and other operating adjustments**

Other operating items make a modest contribution.

**Operating assets and liabilities**

An independently estimated $1.0 billion annual use of cash as slower collections and operating-asset growth slightly exceed liability sources. Operating cash flow is the sum of the walk.

##### Capital spending — model forecast

The low case retains substantial replacement and capacity spending despite slower returns. The category allocation is my estimate rather than company guidance for fiscal 2029.

| Short-lived assets, primarily CPUs and GPUs | $186B |
| --- | --- |
| Long-lived assets | $58.8B |
| Unallocated capital spending | $0 |
| Total capital spending | $245B |

**Short-lived assets, primarily CPUs and GPUs** My low-case allocation assigns 76% of cash additions to compute assets.

“Roughly three-quarters of our CapEx was for short-lived assets, primarily CPUs and GPUs, including higher memory and storage costs, as we continue to invest in the infrastructure required for our customers to build and scale AI applications.”

**Long-lived assets** My forecast assigns 24% to long-lived infrastructure.

“The remaining spend was for long-lived assets.” “Our cloud and AI strategy requires substantial investments and depends on evolving customer demand, technological developments, competitive dynamics, and regulatory conditions, any of which could adversely affect our business, financial condition, and results of operations.”

**Gemini 4 Argon**

| Net income | $181B |
| --- | --- |
| Depreciation, amortization, and other | $80.0B |
| Stock-based compensation expense | $14.3B |
| Deferred income taxes | $9.00B |
| Net working capital and unearned revenue movements | −$2.10B |
| Operating cash flow | $282B |
| Less capital spending | −$180B |
| Free cash flow | $102B |

**Net income**

Forecast low-case FY2029 net income of $180.8 billion, consistent with $24.30 adjusted diluted EPS across 7,440 million diluted shares.

**Depreciation, amortization, and other**

Forecast $80.0 billion of depreciation and amortization.

**Stock-based compensation expense**

Forecast $14.3 billion of stock-based compensation.

**Deferred income taxes**

Forecast $9.0 billion of deferred tax adjustments.

**Net working capital and unearned revenue movements**

Forecast $2.1 billion working capital outflow under slower commercial bookings.

##### Capital spending — model forecast

In the low case, moderated AI capacity expansion holds FY2029 cash CapEx to $180.0 billion ($134.0 billion Servers, network equipment, and software, $38.0 billion Buildings and improvements, and $8.0 billion unallocated).

| Servers, network equipment, and software | $134B |
| --- | --- |
| Buildings and improvements | $38.0B |
| Unallocated capital spending | $8.00B |
| Total capital spending | $180B |

**Servers, network equipment, and software** Model estimate of $134.0 billion (74.4% of low-case FY2029 cash CapEx) under a moderated server refresh pace.

“Servers, network equipment, and software 244,840 215,874”

**Buildings and improvements** Model estimate of $38.0 billion (21.1% of low-case FY2029 cash CapEx) for datacenter buildings and improvements.

“Buildings and improvements 194,619 182,749” “And so if the demand environment changes, you just slow down what is, in fact, the largest component, right, and the driver of COGS.”

**DeepSeek V4.1 Flash**

| Net income | $155B |
| --- | --- |
| Depreciation, amortization, and other | $82.0B |
| Stock-based compensation expense | $17.0B |
| Accounts receivable and unearned revenue, net | $8.00B |
| Other operating items, net | −$14.5B |
| Operating cash flow | $248B |
| Less capital spending | −$245B |
| Free cash flow | $2.50B |

**Net income**

Low case net income, about $20.80 a share.

**Depreciation, amortization, and other**

Rises more slowly than the base case.

**Stock-based compensation expense**

About 3.5% of revenue.

**Accounts receivable and unearned revenue, net**

Slower billings growth.

**Other operating items, net**

Prepayments, long-term assets, payables and cash taxes.

##### Capital spending — model forecast

Capital spending still grows in the low case, so free cash flow stays close to zero. The asset split is my estimate.

| Short-lived assets, primarily CPUs and GPUs | $167B |
| --- | --- |
| Long-lived assets | $78.4B |
| Unallocated capital spending | $0 |
| Total capital spending | $245B |

**Short-lived assets, primarily CPUs and GPUs** My estimate at 68% of cash capital spending.

“short-lived assets, primarily CPUs and GPUs”

**Long-lived assets** My estimate for the remaining 32%.

“The remaining spend was for long-lived assets.” “Customer demand continues to exceed available supply.”

#### Three ways the low case happens

These levers explain the outcome together; each is not a separate one-in-ten event.

1. **Pricing competition lowers returns on the installed fleet.** The company warns AI prices may fall through competition and commoditization. Azure revenue per unit of capacity falls, so sales grow slowly while the fleet's costs stay, cutting earnings faster than sales.
  Watch Falling revenue per token or weaker Azure growth in fiscal 2028 despite new capacity.
  **Model reasoning**
  - **GPT-6.1 Sol** Later years suffer lower infrastructure returns and stronger pricing competition.
  - **GPT-6.1 Sol** competition can pass efficiency savings to customers
  - **GLM 5.3** Azure growth decelerating below the guided 49-50% as engineering efficiency gains prove one-off and token pricing falls
2. **Depreciation and fleet replacement keep costs and spending high.** Servers bought in fiscal 2026 and 2027 depreciate and begin needing replacement. Gross margin falls further and capital spending stays high, so free cash flow is squeezed: FY2029 low cash fcf, average: $45.8B
  Watch Capital spending plans that stay high while sales growth slows through fiscal 2028.
  **Model reasoning**
  - **GPT-6.1 Sol** Depreciation and financing commitments outlast growth
  - **GLM 5.3** Gross margin compression from Azure mix, memory and component cost inflation, and depreciation on the doubled fleet
  - **DeepSeek V4.1 Flash** is why the low cases keep capital spending high and take the hit in cash flow instead.
3. **The largest customer slows its spending.** OpenAI supplied a large share of commercial backlog and of first-quarter revenue. Less consumption from one customer cuts Azure growth and can affect collections as well as revenue.
  Watch Revenue from OpenAI in the quarterly reports falling, or its commitments renegotiated.
  **Model reasoning**
  - **GPT-6.1 Sol** It widens the later-year downside because a large customer can alter consumption and funding.
  - **Gemini 4 Argon** where any moderation in frontier training or inference spend or pricing compression across competing models would weigh on Azure growth and token pricing

Sales would grow little, to about FY2029 sales low, average: $470B, with non-GAAP earnings per share near FY2029 adjusted EPS low, average: $22.00. Returns on the installed fleet would fall with pricing competition, depreciation and replacement of the first AI servers would keep costs high, and a large customer would slow its spending. Sol goes furthest, FY2029 sales low, sol: $455B and FY2029 adjusted EPS low, sol: $19.50, because it alone has later years suffering lower infrastructure returns and stronger pricing competition, with depreciation and financing commitments outlasting growth.

Against fiscal 2028's middle, the low case is close to a standstill: FY2029 sales low growth on FY2028, average: +1.8%

The six lows run from $455B (GPT-6.1 Sol) to $490B (Gemini 4 Argon).

First sign Over fiscal 2028's reports: Azure growth fading faster than capacity additions and cloud gross margin falling.

#### Watch

Fiscal 2028's reports: whether cloud gross margin stabilises, whether capital spending growth slows, and whether backlog grows outside OpenAI. Stable margins and slowing spending point higher; falling token prices, underused capacity or a large customer cutting back point lower.

The years at a glance · sales

FY2024 **$245B**

FY2025 **$282B**

FY2026 **$332B**

FY2027 **$396B** $383B – $409B

FY2028 **$462B** $426B – $500B

FY2029 **$532B** $470B – $597B

$300B $400B $500B $600B

50% range 80% range

The years at a glance · adjusted EPS

FY2024 ○ **$11.80**

FY2025 **$14.13**

FY2026 **$17.28**

FY2027 **$19.82** $18.60 – $21.10

FY2028 **$22.98** $20.21 – $26.04

FY2029 **$26.57** $22.00 – $31.70

$15.00 $20.00 $25.00 $30.00

50% range 80% range

○ FY2024: as the company first printed it, on its earlier definition; it has not reprinted the year on the current one.