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cutoff 30 October 2026, 05:24 ET

Microsoft reports Q2 FY27 in January 2027. Date not yet set. Our numbers below have a cutoff of 30 October 2026, 05:24 ET and do not change.

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

MSFT reports Q2 FY27

The report date is not in the calendar yet.

Next report · Q2 FY27$97B+0% above the $96B–$97B outlookadjusted EPS $4.91

Quarter after · Q3 FY27$99B+20% on Q3 FY26adjusted EPS $4.90

Q2 FY27 · the quarter MSFT reports

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 – $98B80% 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 – $5.0580% 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: $2.2B3 of 6
- Opus 5.5Cash paid for property and equipment, which is the measure used here, runs about $6 to $7 billion lower.
- Opus 5.5The second quarter is seasonally weak because unearned revenue falls after the June-quarter billings, so its free cash flow is close to zero.
- GLM 5.3I use that same cash basis for my capex and free-cash-flow forecasts
- Kimi K3.1 ProThe 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 → $81.3Bguided “USD 79.5 billion to USD 80.6 billion”

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

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

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

Q2 FY27+0.3% above$96.0B–$97.1B → $97.4Bguided “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 teensTherefore, 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 halfIn 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 expenseWe 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 percentWindows OEM and devices revenue should decline in the mid-30s.October 2026 earnings call
Capital spending outlook: Higher than the first quarter, including finance leasesIn Q2, we expect CapEx spend will be over $50 billion.October 2026 earnings call
First-quarter revenue: Q1-FY2027 sales, reported: $92.3BThis 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'.

Middlethe forecast50% range1 in 4 chance the result comes in below this bar, 1 in 4 above it. Half the time it lands inside.80% range1 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

adjusted EPS

PricedIn$4.91$4.60 – $5.21

Low and high

Basethe 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 5.5In 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 5.3I 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 5.3I assume Azure growth holds near 49% in Q2
- DeepSeek V4.1 FlashI 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 5.3I assume no OpenAI investment impact in my forecast quarters and declare the adjustment item as none
- Kimi K3.1 ProAdjusted 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 5.5I 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 5.3This 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

$97Bsales

$4.91adjusted EPS

$44.8BCapital spending

$2.25BFree 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 improvementsAnd 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.

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.

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 244,840 215,874Roughly 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 194,619 182,749And 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.

Highabout 1 chance in 10 of better

Q2-FY2027

$100Bsales · +2% vs base

$5.21EPS · +6% vs base

$46.5BCapital spending

$5.30BFree 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.

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 improvementsCustomer 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.

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

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.

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 194,619 182,749In 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.

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
WatchAzure growth above the guided range at the next report.
Model reasoning
- Opus 5.5Faster capacity delivery and fleet efficiency
- DeepSeek V4.1 FlashAzure growth accelerating to about 55% on earlier capacity delivery and faster monetisation of the CPU and GPU fleet
- Kimi K3.1 ProEarlier capacity and faster Azure monetization
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.
WatchMicrosoft 365 commercial cloud growth at the next report above the guided pace.
Model reasoning
- Opus 5.5Copilot and consumption-based pricing
- DeepSeek V4.1 FlashMicrosoft 365 commercial cloud accelerating to about 21% as E7 and Copilot usage-based billing scale
- GPT-6.1 SolBroader enterprise agent adoption
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.
WatchXbox content and services growth at the next report above the guided range.
Model reasoning
- Opus 5.5Strong holiday gaming content
- Gemini 4 ArgonStronger 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 signAt the next report, whose date the company has not given: Azure and Microsoft 365 growth above their guided ranges.

Lowabout 1 chance in 10 of worse

Q2-FY2027

$95Bsales · −2% vs base

$4.60EPS · −6% vs base

$44.2BCapital spending

−$2.58BFree 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.

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 improvementsIn 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.

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

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.

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 194,619 182,749Capital 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.

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
WatchThe company saying at its next report that third-party capacity slipped again, or Azure growth below the guided range.
Model reasoning
- Opus 5.5Azure growth held back by capacity
- GPT-6.1 SolDelayed usable cloud capacity
- DeepSeek V4.1 FlashAzure and Foundry revenue growth slowing to about 40% as delayed third-party GPU-as-a-service capacity slips out of the quarter again
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.
WatchWindows OEM and devices revenue at the next report falling more than the guided decline.
Model reasoning
- Opus 5.5Windows and devices decline deeper than the mid-30s percent
- DeepSeek V4.1 FlashWindows OEM and devices falling closer to 40% as channel inventory stays elevated and PC prices rise
- GLM 5.3A weak PC market keeping Windows OEM in decline
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.
WatchTotal cost of revenue at the next report above the guided range.
Model reasoning
- Opus 5.5Depreciation and component costs squeeze gross margin
- DeepSeek V4.1 Flashmemory and storage component inflation pushing cost of revenue up faster than revenue
- Kimi K3.1 ProHigher 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 signAt 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.

Q3 FY27 · the quarter after

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 – $101B80% 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 – $5.0980% 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: $9.3B3 of 6
- Opus 5.5That raises my third-quarter capital spending and supports Azure growth later in the year.
- Kimi K3.1 ProFree cash flow uses operating cash flow less cash additions to property and equipment, not total capital expenditures including finance leases.
- GLM 5.3I 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%

What it rests on

Delayed capacity: Some third-party GPU contracts delayed to the second halfIn 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 capacityIn 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 thirdWith 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 userGrowth 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 yearWe 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'.

PricedIn$99B$95B – $103B

adjusted EPS

PricedIn$4.90$4.50 – $5.30

Low and high

Basethe 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 SolMy March estimate is $101.5 billion as delayed capacity starts arriving; strong prior comparisons and weak personal computers restrain acceleration.
- Opus 5.5That 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 5.3moderates 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 5.5I 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 5.5Depreciation 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 5.3I 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 5.5For the third quarter I deepen other income to minus $400 million because finance-lease interest keeps growing.

If all of this happens

$99Bsales

$4.90adjusted EPS

$49.4BCapital spending

$9.27BFree 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.

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.

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.

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.

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

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 194,619 182,749In 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.

Highabout 1 chance in 10 of better

Q3-FY2027

$103Bsales · +4% vs base

$5.30EPS · +8% vs base

$52.4BCapital spending

$12.2BFree 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.

long-lived assets The remaining quarter, my assumption.

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 improvementsCustomer 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.

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

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.

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

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.

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.

Three ways the high case happens

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

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
WatchA third-quarter Azure outlook at the next report above the second quarter's pace.
Model reasoning
- GLM 5.3Third-party GPU capacity landing in the second half of FY2027 without further slips and being monetized immediately
- Kimi K3.1 ProEarlier capacity and faster Azure monetization
- GPT-6.1 SolFaster commissioning and higher fleet utilization
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.
WatchMicrosoft 365 commercial cloud growth at the next report above the guided pace.
Model reasoning
- GPT-6.1 SolBroader enterprise agent adoption
- GLM 5.3E7 and usage-based Copilot billing pushing Microsoft 365 commercial cloud growth into the 20s
- Kimi K3.1 ProStronger AI application adoption and usage-based revenue
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.
WatchMicrosoft Cloud gross margin at the next report at or above the guided level.
Model reasoning
- Kimi K3.1 ProBetter utilization and product-level margins
- GPT-6.1 SolPricing and efficiency protect profit per workload
- DeepSeek V4.1 Flashgross 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 signAt the next report, whose date the company has not given: a third-quarter range above the models' middle.

Lowabout 1 chance in 10 of worse

Q3-FY2027

$95Bsales · −4% vs base

$4.50EPS · −8% vs base

$48.4BCapital spending

$3.91BFree 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.

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.

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.

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

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.

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

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 194,619 182,749Capital 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.

Three ways the low case happens

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

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
WatchThe third-quarter outlook at the next report guiding Azure below the second quarter's pace or naming further delays.
Model reasoning
- DeepSeek V4.1 FlashAzure 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 ProDelayed capacity and slower Azure consumption
- GPT-6.1 SolDelayed usable cloud capacity
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.
WatchMicrosoft 365 commercial cloud growth at the next report failing to rise above the guided pace.
Model reasoning
- GPT-6.1 SolLower paid usage and token pricing
- GLM 5.3Microsoft 365 Copilot and E7 seat growth stalling at enterprise renewals as CIOs scrutinize AI spend
- Kimi K3.1 ProLower premium subscription and usage monetization
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.
WatchMicrosoft Cloud gross margin at the next report below the company's guided level.
Model reasoning
- Kimi K3.1 ProHigher infrastructure depreciation and component costs
- DeepSeek V4.1 Flashmemory and storage component inflation pushing cost of revenue up faster than revenue
- Gemini 4 Argonheavy 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 signAt 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.

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