TMTPOST -- Microsoft Corporation indicated it faced more than $1 billion loss in the current quarter from its equity stake in OpenAI.

Credit:Microsoft

Microsoft will record around $1.5 billion in other expense in the quarter ended December 2024, mainly because of an expected investment loss at OpenAI, the chief financial officer (CFO) Amy Hood said on the company's earnings call last week.

For Microsoft, the loss is accounted for under the equity method, said Hood. The accounting approach refers to a company's share of the invested company's profit or loss in a given period, a Microsoft spokesperson later clarified.

The additional detail is "not due to a change in our partnership or investment in OpenAI," CNCB cited an email of the spokesperson. "Our partnership with OpenAI continues to deliver results, as we build differentiated IP and drive revenue momentum."

Microsoft began to invested in OpenAI in 2019 as the ChatGPT developer's early investor and input a total of $13 billion as of September 30. OpenAI announced in October that it has raised $6.6 billion in new funding at a $157 billion post-money valuation. The funding round made OpenAI one of the top three most valued startups across the world, along with SpaceX and ByteDance. Microsoft was said to join in the funding with about $750 million.

OpenAI will remain unprofitable until 2029 and its could incur losses up to $14 billion in 2016, nearly tripling this year's expected loss, according to an analysis of data from OpenAI financial reports seen by The Information in October. It is reported that OpenAI expected to make an annual profit of $14 billion in 2029 after a total of $44 billion losses between 2023 and 2028. The aforementioned losses exclude stock compensation, which is one of OpenAI's biggest expenses, according to the report. It said the company recorded stock compensation of $15 billion in the first half of year, likely equivalent to the revenue in the same period.

Based on the reported financial reports, OpenAI projected it will spend more than $200 billion through the end of the decade, excluding stock compensation. Around 60% to 80% of its expected annual spending will go toward either training or running the AI models.

Besides heavy investment in OpenAI, the latest earnings showed Microsoft has continued aggressive spending directly on artificial intelligence (AI). Capital expenditure, or Capex, including assets acquired under finance leases soared 78.6% to $20 billion, after a 77.6% YoY increase in Capex for the second quarter. Microsoft said the Capex aims to support demand in its cloud and AI offerings. Of its cloud and AI expenditures, roughly half was for long-lived assets. Cash paid for property and equipment was $14.9 billion with a 50.7% surge, while analysts expected to be $14.55 billion, up 47% YoY.

Microsoft will continue ramp up investments in AI infrastructure, according to the earnings call. CFO Hood said Microsoft expects its second-quarter cloud gross margin percentage to be down from last year, "driven by the impact of scaling our AI infrastructure." She added that capital expenditures to increase "on a sequential basis given our cloud and AI demand signals."