For the first time in its 51-year history, Microsoft is offering a voluntary early retirement program to US employees up to the level of senior director. The move, which targets roughly 8,750 workers — about 7% of the company’s domestic workforce — comes just days before the software giant reports fiscal third-quarter results on Wednesday. To qualify, employees must have a combined age and tenure of at least 70 years.
The decision marks a softer approach than last summer’s 9,000 layoffs. Alongside the retirement offer, Microsoft is streamlining its performance review system, reducing the number of employee rating tiers from nine to just five. The belt-tightening comes as the stock trades roughly 11% lower in euro terms since the start of the year, closing Friday at €357.35. A relative strength index reading of 28 suggests the shares are currently oversold.
The Cost of the AI Bet
Behind the austerity lies a mounting expense problem. Microsoft poured $37.5 billion into data centers and infrastructure in the December quarter alone, yet revenue from those investments has yet to catch up. The gap between spending and returns is widening, putting pressure on management to demonstrate that its massive AI wager is paying off.
Nowhere is that tension more visible than with Microsoft 365 Copilot. Bank of America estimates that just 15 million customers are using the AI assistant — a penetration rate of only 3.5% of the total commercial user base. While that represents a 3.5-fold increase year-over-year, it remains a fraction of the addressable market. The company has over 400 million existing 365 users globally, meaning roughly 96% have yet to adopt the premium AI add-on.
Azure Takes Center Stage
Analysts will be laser-focused on Microsoft’s cloud business when earnings land after the US market close on Wednesday. The company has guided for Azure growth of 37% to 38% in constant currency for the quarter. Morgan Stanley sees 39% as achievable — a level the bank considers a psychological threshold for investors. Critically, the bank notes that Azure’s growth is currently constrained not by demand but by capacity bottlenecks in AI server infrastructure. The pipeline is full; the bottleneck is available computing power.
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The consensus estimate calls for adjusted earnings of $4.04 per share, a roughly 17% increase from the same quarter last year, on revenue of about $81.3 billion. Microsoft has beaten expectations in each of the past four quarters. Morgan Stanley maintains an “Overweight” rating with a $650 price target, while Morningstar assigns a fair value of $600, suggesting both see significant upside from current levels.
Game Pass Pivot Signals Gaming Headwinds
Away from the cloud, Microsoft is making a strategic U-turn in its gaming division. Xbox chief Asha Sharma has acknowledged internally that Game Pass had become too expensive. Starting April 21, Game Pass Ultimate will drop from $29.99 to $22.99 per month, while PC Game Pass falls from $16.49 to $13.99. The price cuts reverse two consecutive increases.
But there’s a catch: new Call of Duty titles will no longer launch on Game Pass immediately. Instead, they will arrive roughly a year later, in time for the following holiday season. CFO Amy Hood had previously admitted to analysts that revenue from Xbox content and services fell short of internal expectations. Compounding the issue, Microsoft is facing an as-yet-unspecified impairment charge in its gaming segment — the division it expanded dramatically in 2023 with the roughly $75 billion acquisition of Activision Blizzard.
What Wednesday Will Reveal
Hood will face analysts on Wednesday evening to explain how quickly the company’s new AI products can monetize the billions already spent. The May 1 launch of the new enterprise tier, Microsoft 365 E7, represents the next potential revenue driver.
For investors, the stakes are clear. If Microsoft delivers on Azure growth and shows accelerating Copilot adoption, the re-rating of its AI monetization story could begin in earnest, as Morgan Stanley believes possible. Miss expectations, and the dour sentiment of recent months is likely to persist. The stock currently sits nearly 24% below its 52-week high — a gap that underscores how much ground remains to be recovered.
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