Microsoft’s $900 Million Severance Bet: Restructuring for AI While Margins Come Under Fire

For the first time in its 51-year history, Microsoft is offering voluntary buyouts to its US workforce. The move, affecting up to 8,750 employees or roughly 7 percent of the company’s 125,000 American staff, comes with an estimated $900 million charge in the current quarter. The message is unmistakable: capital is being redirected from traditional roles into artificial intelligence. Teams working on AI and Copilot are explicitly excluded from both the severance program and a hiring freeze that has been in place since March.

The restructuring coincides with a quarter that presented two starkly different narratives. On one hand, Microsoft delivered a revenue beat of $82.9 billion for its fiscal third quarter ending March, representing 18 percent year-over-year growth. Azure surprised to the upside, expanding 40 percent and exceeding the company’s own guidance. Net income climbed 23 percent to $31.8 billion, while earnings per share of $4.27 comfortably topped the $4.06 consensus estimate. The AI business now runs at an annualized rate of $37 billion, more than double the figure from a year ago.

On the other hand, the cost of that growth is becoming impossible to ignore. Capital expenditures reached $30.9 billion, dragging free cash flow down to $15.8 billion — a 22 percent decline from the same quarter last year. CFO Amy Hood has signaled that full-year 2026 capital spending will hit $190 billion, a 61 percent jump from 2025. Higher component prices alone account for roughly $25 billion of that increase. The gross margin slipped to 67.6 percent, its lowest level since 2022, weighed down by rising depreciation charges on new data centers.

Should investors sell immediately? Or is it worth buying Microsoft?

The stock, which traded around $414 on May 1, has fallen 12 percent since the start of the year — the weakest quarterly performance since 2008. Analysts are divided on what comes next. Barclays trimmed its price target from $600 to $545 while maintaining an “Overweight” rating. Wells Fargo edged its target up to $625. Bank of America and Mizuho kept their buy calls with targets of $500 and $515 respectively, while Citi raised its target to $620.

Behind the numbers, Microsoft has fundamentally restructured its relationship with OpenAI. The revised agreement ends the revenue-sharing arrangement that had Microsoft paying OpenAI for access to its models. Going forward, money flows in only one direction: OpenAI will continue to pay Microsoft a 20 percent revenue share through 2030, though with an undisclosed aggregate cap. Crucially, a clause that would have freed OpenAI from payments upon achieving artificial general intelligence has been removed — a risk Microsoft had long flagged. Any cloud provider can now host OpenAI models, ending Azure’s years-long exclusivity. Microsoft retains a license to OpenAI’s intellectual property for another six years.

Truist analyst Terry Tillman summed up the margin implications: when you stop paying a revenue share, your margins get a natural lift. The question is whether that benefit will be enough to offset the broader cost pressures.

For the current quarter, Microsoft expects revenue between $83.5 billion and $85 billion. Demand is not the issue. The central debate for investors is whether the company can translate its massive infrastructure spending into sustainable profit growth — or whether the cost of building the AI future will continue to eat into returns faster than new revenue can replenish them.

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