Microsoft scheduled $32.4bn of lease payments for fiscal 2027. Its latest filing accounts for $14.4bn through cash already paid and future payments on commenced leases. The remaining $18bn depends on how the June schedule develops.
Microsoft's annual report scheduled $32.4bn of lease payments for fiscal 2027, the year to June. Three months later, its latest disclosures account for $14.4bn of that through cash paid and remaining payments on leases already commenced.
The other $18bn is an accounting question. The June schedule included substantial payments on leases that had been signed but had not begun. The September report does not show how much of that timetable still holds.
The timing determines how much of Microsoft's operating cash the lease bill absorbs as datacentres move from construction into service. Finance chief Amy Hood said on Wednesday that some third party capacity deliveries had slipped into the second half of the fiscal year. Microsoft has not said how much of that capacity relates to these leases.
Microsoft is also launching a bond offering reported at $25bn, with orders that Bloomberg said peaked at $115bn. Only the preliminary prospectus was on file by Thursday evening, with sizes and coupons blank.
The lease calculation
The calculation starts with the 10-K. Its contractual obligations table lists $32.4bn of operating and finance lease payments, including interest, for fiscal 2027. The lease note puts payments on leases running at 30 June at $13.2bn.
The table's lifetime lease total of $443.5bn matches, within rounding, the note's $114.4bn on running leases plus $329.1bn not yet commenced. On that reconciliation, the other $19.2bn of fiscal 2027 payments sat with arrangements that had not commenced.
The September 10-Q provides the next figures. Microsoft paid $3.3bn on leases in the quarter, and its maturity table shows $11.1bn more due by June on leases running at 30 September. Together that is $14.4bn. Against the June schedule, $18.0bn is unexplained by those two measures.
What the $18bn difference means
The $18bn is a reconciliation difference, not a disclosed contract category or a guaranteed amount. Contracts can be amended, conditions can go unmet and payment dates can move. Microsoft's filings give annual totals, not a quarterly timetable.
The first quarter does not settle the timing either way. Its $3.3bn is close to a quarter of the $13.2bn due on leases running in June. A year earlier, Microsoft's first quarter accounted for about 23.5 percent of the year's eventual lease cash. Neither comparison reveals the quarterly timing of the much larger uncommenced schedule.
Leases that have not yet started are still growing in value. Arrangements not yet commenced rose from $329.1bn in June to $364.6bn in September, and Microsoft says some are "subject to certain contractual conditions being met". New leases also brought $11.7bn of right of use assets onto the balance sheet in the quarter.
Commencement and payment are separate events. A lease commences when the asset is available for use, which is when it joins the balance sheet. Depending on the contract, payments can start later, for example after construction conditions are met.
Hood's comments on the 28 October call bear on the timing, though not directly on leases. She said "some third-party capacity deliveries" planned for the quarter "were delayed". Spending would accelerate in the second half, she said, with "the 3P capacity deliveries that shifted to H2".
The timing matters because the bill is so large. Microsoft paid $12.1bn on leases in fiscal 2026, about 7 percent of that year's $182.9bn of operating cash flow. The $32.4bn schedule would equal about 18 percent of the same base. If the schedule holds, rent would take about 11 percentage points more of Microsoft's operating cash within a single year.
Where the payments appear
Accounting will shift where that rent shows up. On the July call, Hood said Microsoft was extending datacentre useful lives from 15 to 25 years. As a result, "more of our future datacenter leases will shift from finance leases to operating leases". Microsoft counts finance leases in capital expenditure at commencement; operating leases are not counted.
The September quarter is consistent with that shift. Right of use assets from finance leases fell from $9.1bn a year earlier to $5.2bn, while those from operating leases rose from $1.4bn to $6.5bn. Operating lease payments run through operating cash flow. More of the lease bill will therefore show up as lower operating cash flow rather than as capex.
Microsoft already spends heavily from its operating cash. Over the four quarters to September it was $195.9bn. Property and equipment, acquisitions and other investing, which Microsoft describes as primarily to facilitate component purchases, took $164.1bn. Dividends of $27.0bn, repurchases of $21.0bn, debt repayment of $7.9bn and other financing, net, took $57.4bn.
On CTOL's arithmetic that leaves a residual of minus $25.6bn before investment portfolio transactions. It is not free cash flow or a funding gap. Without repurchases it would be about minus $4.6bn, though that line includes shares withheld to settle employee taxes, not only open market buybacks.
Hood has said Microsoft will "access additional sources of funding when we believe it is attractive to do so", to "preserve financial flexibility". She expects free cash flow to stay positive this fiscal year. At issuance the bond adds as much cash as debt. The prospectus allows proceeds for capital expenditure, repurchases, acquisitions or repaying debt.
CTOL sees the lease schedule as a more useful measure than the bond of how Microsoft's AI build will affect cash flow. The filings establish how much of this year's bill is already in force. They do not establish when the rest arrives.
What to watch in March
The March 10-Q will provide a clearer test. Add cumulative lease cash paid to the remaining fiscal 2027 payments on commenced leases. The total shows how much of the year's cash burden is already reflected in payments or recognised contracts. If the total remains below $23.4bn, more than $9bn of the June schedule will still be unexplained by those two measures with one quarter left.
That would raise questions about the original timetable, though the filings would not show which contracts had been delayed, amended or newly commenced.