microsoft's large-scale investment in OpenAI is putting pressure on the company's earnings, with an expected $1.5 billion in other expenses to be recorded in the fourth quarter, mainly due to expected investment losses in OpenAI.
$Microsoft (MSFT.US)$ Entering a new phase in the relationship with OpenAI, disclosing the private equity investment in OpenAI.
On Thursday, October 31, Microsoft stated in its third-quarter financial report that it will disclose the investment losses recorded due to its stake in OpenAI in the fourth quarter. Yesterday, Microsoft first disclosed its private equity investment in OpenAI, writing in the latest U.S. Securities and Exchange Commission (SEC) filing:
"We have invested in OpenAI Global, LLC ("OpenAI"), with a total investment commitment of 13 billion USD, and the investment is accounted for using the equity method."
Accounting expert Francine McKenna told Business Insider that the latest disclosure indicates that Microsoft's previous investment in OpenAI may have included 'soft money,' such as discounts or credit for services, as well as internal expenses that did not meet certain thresholds, so Microsoft is not required to disclose detailed information.
Microsoft's large-scale investment in OpenAI is putting pressure on its earnings. Microsoft's Chief Financial Officer Amy Hood said during an earnings call overnight that the company expects to record around 1.5 billion USD in other expenses in the fourth quarter, mainly due to anticipated investment losses in OpenAI.
Hood added that for Microsoft, this loss is accounted for using the equity method. A Microsoft spokesperson explained that this accounting method refers to the recognition of net income or net loss of the invested company based on the shareholding percentage within a specific period.
However, the spokesperson added that recording losses "is not due to any change in our cooperation or investment situation with OpenAI. Our partnership will continue to yield results as we have built differentiated intellectual property and driven revenue growth."
As of September 30th, Microsoft has invested 13 billion USD in OpenAI. In a new round of financing announced in October, Microsoft once again invested 0.75 billion USD, bringing OpenAI's valuation to 157 billion USD.
Microsoft's relationship with OpenAI has entered a new stage.
In recent years, the relationship between Microsoft and OpenAI has been evolving. In July, Microsoft described its relationship with OpenAI as a partnership rather than a private equity investment. However, in yesterday's SEC filing, Microsoft even began disclosing changes in the value of its OpenAI holdings.
In its annual SEC filing at the end of July, Microsoft wrote:
"We have a long-term partnership with OpenAI, deploying OpenAI's models in consumer and enterprise products. As the exclusive cloud computing service provider for OpenAI, Azure supports all of OpenAI's workloads. We have also increased investments in developing and deploying specialized supercomputing systems to accelerate OpenAI's research."
McKenna also indicated that the transition from a "partnership" to an "equity method investment" disclosure, including recording losses, signifies a new accounting phase in Microsoft's relationship with OpenAI.
"Microsoft may have had private equity investments in OpenAI before, but they did not disclose them, possibly because it was only soft funds, with little or no cash, therefore deemed unimportant. With the latest round of financing, they have crossed a threshold."
However, a Microsoft spokesperson stated yesterday that there have been no changes in Microsoft's partnership with OpenAI or its investment status in OpenAI.
Editor/Rocky
