Microsoft's substantial investment in OpenAI is impacting its earnings. The company plans to record $1.5 billion in additional expenses in the fourth quarter, primarily due to anticipated investment losses with OpenAI. This marks a new phase in Microsoft's relationship with OpenAI as it disclosed its equity investment in the company.
On October 31, Microsoft revealed in its third-quarter earnings report that it will report an investment loss from its stake in OpenAI. The latest SEC filing showed Microsoft's investment commitment to OpenAI Global, LLC, amounts to $13 billion, accounted for under the equity method.
Accounting expert Francine McKenna suggested that the previous investments might have involved "soft money," such as service discounts or credits that Microsoft might not have needed to disclose publicly until now. CFO Amy Hood stated that the $1.5 billion loss is calculated based on the equity method of accounting, indicating Microsoft's recognition of OpenAI's net profit or loss proportional to its holding.
A Microsoft spokesperson clarified that this loss does not signify any change in the partnership or investment conditions. The collaboration continues to be productive, driving revenue growth and building differentiated intellectual property.
As of September 30, Microsoft invested $13 billion in OpenAI, and an additional $750 million was added in OpenAI's October funding round, raising its valuation to $157 billion. Over recent years, Microsoft and OpenAI's relationship has evolved, initially described as a partnership rather than an equity investment.
In late July, Microsoft's SEC filings noted a long-term partnership with OpenAI, deploying OpenAI's models across consumer and enterprise products and supporting all workloads as its exclusive cloud service provider. Microsoft is also investing in dedicated supercomputing systems to speed up OpenAI's research.
McKenna observed that the shift from a "partnership" to an "equity method investment," including loss recognition, signifies a new accounting phase for Microsoft and OpenAI. Although Microsoft may have held equity in OpenAI previously without disclosure, the recent funding round represented a significant threshold.
Despite these developments, Microsoft affirms that its partnership and investment strategy with OpenAI remain unchanged.
