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# Microsoft Corporation (MSFT) — Narrative, Fiscal Year 2026 Fiscal year ended June 30, 2026. Sources are identified by SEC form and accession number at the head of each section. --- ## Business *From the FY2026 Form 10-K, accession 0001193125-26-323660 (filed July 29, 2026).* Microsoft is a technology company whose stated mission is to empower every person and organization to achieve more. It generates revenue by offering cloud-based solutions, content, and services to people and businesses; licensing and supporting software; delivering online advertising; and designing and selling devices. Its largest expenses are employee compensation, support of and investment in cloud services including datacenter operations, product design/manufacturing/marketing/selling, and income taxes. Management frames the cloud business around three economies of scale: datacenters that deploy computational resources at lower cost per unit than smaller facilities; datacenters that aggregate diverse customer, geographic, and application demand patterns to raise utilization of compute, storage, and network; and multi-tenancy that lowers application-maintenance labor cost. R&D is organized around three ambitions — reinventing productivity and business processes; building the intelligent cloud and intelligent edge platform; and creating more personal computing experiences. ### The three reportable segments **Productivity and Business Processes** — FY2026 revenue $140.0 billion (up 16%), operating income $83.9 billion (up 20%). - Microsoft 365 Commercial products and cloud services — Microsoft 365 Commercial cloud (Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot), plus on-premises Windows Commercial and Office licenses. - Microsoft 365 Consumer products and cloud services. - LinkedIn — Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions. - Dynamics — Dynamics 365 (ERP, CRM, Power Apps, Power Automate) and on-premises ERP/CRM. Microsoft 365 Commercial revenue is driven by installed-base growth, average revenue per user expansion, and the continued shift from on-premises Office to Microsoft 365. **Intelligent Cloud** — FY2026 revenue $137.8 billion (up 30%), operating income $57.0 billion (up 28%). - Server products and cloud services — Azure and other cloud services (cloud and AI consumption-based services, GitHub cloud services, Health and Life Sciences cloud services, virtual desktop, other), plus Server products (SQL Server, Windows Server, Visual Studio, System Center, related Client Access Licenses). - Enterprise and partner services — Enterprise Support Services, Industry Solutions, Microsoft Partner Network, Learning Experience. Azure revenue is driven mainly by consumption-based infrastructure- and platform-as-a-service. Azure AI Foundry is the unified platform for building, customizing, and managing AI applications and agents. Microsoft cites custom-built silicon and chip-manufacturer partnerships as part of its AI supply position. **More Personal Computing** — FY2026 revenue $54.1 billion (down 1%), operating income $14.4 billion (up 2%). - Windows and Devices — Windows OEM licensing (Pro and non-Pro through the OEM channel) and first-party Devices (Surface and PC accessories). - XBOX (renamed from "Gaming") — hardware plus content and services: first- and third-party content, XBOX Game Pass and other subscriptions, XBOX Cloud Gaming, advertising, other cloud services. - Search advertising (renamed from "Search and news advertising") — Bing, Copilot, Microsoft News, Microsoft Edge, and third-party affiliates. ### Revenue by product and service offering (FY2026 / FY2025, $ millions) | Offering | 2026 | 2025 | | --- | --- | --- | | Server products and cloud services | 129,425 | 98,435 | | Microsoft 365 Commercial products and cloud services | 101,997 | 87,767 | | XBOX | 21,790 | 23,455 | | LinkedIn | 19,817 | 17,812 | | Windows and Devices | 17,084 | 17,314 | | Search advertising | 15,176 | 13,878 | | Microsoft 365 Consumer products and cloud services | 9,175 | 7,404 | | Dynamics products and cloud services | 9,006 | 7,827 | | Enterprise and partner services | 8,260 | 7,760 | | Other | 109 | 72 | | **Total** | **331,839** | **281,724** | Microsoft Cloud revenue (Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365) was $214.4 billion in FY2026, $168.9 billion in FY2025, and $137.7 billion in FY2024. By geography, FY2026 revenue was $170.8 billion United States and $161.0 billion other countries. No individual customer, and no country other than the U.S., accounted for more than 10% of revenue in FY2026, FY2025, or FY2024. Long-lived assets excluding financial instruments and tax assets were $475.5 billion, of which $300.4 billion in the U.S. ### The OpenAI relationship Microsoft has had a long-term strategic partnership with OpenAI since 2019, extended by a new definitive agreement in October 2025 and again in April 2026. Microsoft holds rights to OpenAI's intellectual property, including models and infrastructure, for integration into its products, and continues to receive revenue-sharing payments. As of June 30, 2026, Microsoft held an equity-method investment representing an approximate **25% interest on an as-converted basis** (down from approximately 27% at March 31, 2026 following the October 2025 OpenAI recapitalization and other funding activity). Total funding commitments are **$13.0 billion, of which $11.9 billion was funded** at June 30, 2026. Because OpenAI is a related party under ASC 850, Microsoft discloses that FY2026 revenue from commercial arrangements with OpenAI, inclusive of revenue-sharing payments, was **$24.1 billion**, and accounts receivable from OpenAI at June 30, 2026 was **$6.0 billion**. Income or loss is recognized using the hypothetical liquidation at book value method because liquidation rights and priorities differ from the underlying ownership interest. ### Other business facts - Approximately **223,000 full-time employees** at June 30, 2026 — 121,000 in the U.S., 102,000 internationally; 89,000 in operations, 77,000 in product R&D, 43,000 in sales and marketing, 14,000 in general and administration. - Distribution runs through direct sales and a broad indirect partner network, plus OEM preinstallation and online/digital marketplaces, with volume purchasing programs tailored by organization size. - Revenue is seasonally highest in the fiscal fourth quarter, driven by a higher volume of multi-year contracts executed in that period. - Microsoft announced 2030 goals in 2020 to be carbon negative, water positive, and zero waste; it acknowledges AI development and deployment has raised and will likely keep raising energy use and emissions, making those goals harder to meet. - Independent compliance functions have been created as required by the EU Digital Markets Act and EU Digital Services Act. - In Q1 FY2026 Microsoft revised its disclosed metrics; Microsoft 365 Consumer subscribers was removed as a metric. --- ## Risk factors *From the FY2026 Form 10-K, accession 0001193125-26-323660. Condensed to the substantive items; boilerplate omitted.* ### The cloud and AI capital cycle — the dominant new risk The 10-K now carries a dedicated risk factor on the AI build-out. Microsoft is making capital and operational investments "at significant scale and on an accelerated timeline," requiring substantial and increasing capital expenditures and continued access to capital, and these investments are being made **in advance of fully developed revenue streams**. Specific exposures management names: - Associated revenue may not be realized in the expected timeframes or at expected levels. Funding depends on generating sufficient cash flow and obtaining financing on acceptable terms; adverse moves in interest rates, credit markets, investor sentiment, or Microsoft's credit ratings could raise its cost of capital or limit execution. - Demand is evolving and difficult to forecast. **Overestimating demand or misaligning capacity investments may leave infrastructure underutilized and lead to impairment of balance-sheet assets.** Underestimating it limits the ability to serve customers. - The cost structure for AI is uncertain — model training and inference costs, component availability and pricing, and energy costs. If costs stay elevated or AI pricing falls through competition or commoditization, margins suffer. - The AI strategy depends on strategic third-party relationships that "may change over time," where many partners also compete with Microsoft and, in some cases, are significant Azure customers. The 10-K warns explicitly that expected consumption or anticipated demand from strategic partners and other customers "may not materialize, may be delayed or reduced, or may decline over time," and that Microsoft may itself modify capacity allocations, deployment priorities, or pricing. ### Infrastructure, power, and supply - Datacenter expansion depends on permitted and buildable land, predictable and affordable energy, networking supplies, and servers including GPUs. Electricity generation, transmission, and distribution infrastructure in many regions is facing demand and capacity constraints; power limits, connection delays, outages, or utility requirements could restrict expansion. - Land availability, zoning, environmental review, permitting, community opposition, state and local moratoriums, and "increasingly coordinated opposition to infrastructure development across jurisdictions" can delay projects and raise costs. - Construction and operation require large numbers of skilled technical, engineering, and construction personnel; labor shortages, wage inflation, and immigration restrictions could extend timelines. - Limited suppliers exist for certain critical components, which are in short supply. Microsoft has experienced and may continue to experience shortages of semiconductors, networking equipment, power systems, and cooling equipment, and may have to accept long-term purchase commitments, price commitments, or above-market prices to secure supply. Competitors scaling their own infrastructure use some of the same suppliers. - Microsoft also relies on third-party colocation facilities, leased datacenters, and cloud infrastructure providers for portions of its operations. ### Competition Competitors range from diversified global companies to small specialized firms; barriers to entry in many businesses are low. Named competitive vectors: vertically integrated hardware-plus-software models; competing device platforms eroding the Windows PC franchise (Microsoft notes competing with operating systems licensed at low or no cost may decrease Windows margins, and that some of its own devices compete with its OEM partners' products); rival content and application marketplaces; advertising-funded free products; and open-source distribution including open AI models. In AI specifically, Microsoft competes with hyperscalers, open-source offerings, and frontier model providers, "some of which are also current or potential partners." Microsoft also flags that expanding its own vertically integrated capabilities — proprietary hardware, infrastructure, and AI models — could increase its cost structure and reduce margins. ### Cybersecurity and platform abuse - Microsoft discloses that it has experienced cybersecurity incidents in which threat actors gained unauthorized access to its systems and data as well as customer, partner, and supplier systems and data. It specifically re-states the nation-state incident disclosed on Form 8-K January 19, 2024 (amended March 8, 2024): beginning in late November 2023, a nation-state-associated threat actor used a password spray attack to compromise a legacy test account and gain access to Microsoft email accounts, then used that information to reach **some source code repositories and internal systems**. The 10-K states the actor could continue to use this and other information to attempt further access, and that the incident has and may continue to harm reputation and customer relationships. - Threat actors are using AI to increase attack speed and scale; Microsoft's increasing internal use of AI models, copilots, and autonomous agents "may create new attack surfaces." - Supply-chain compromise (malware in software updates, compromised supplier or open-source code), on-premises products such as Exchange Server where Microsoft has limited visibility into customer environments, and inadequate customer patching are all called out. - Separate risks cover misuse of personal data; inability to prevent scraping of LinkedIn and other content, made harder by "increasing use of agentic AI"; and abuse of advertising, professional, marketplace, and gaming platforms, including harmful content and emerging child-safety/age-assurance regulation. ### AI development, deployment, and liability Models and training methodologies may be flawed; datasets may be biased or inaccurate; generated content may be offensive, illegal, inaccurate, or harmful. Agentic AI systems that act autonomously and "companion or highly-personalized AI systems" that create user over-reliance are named specifically. Microsoft states it has experienced, and expects to continue to experience, instances where its AI produces unintended consequences or operates inconsistently with its responsible-AI policies. Exposure spans model capability, IP, data privacy, and product liability claims, compounded by a diverging global regulatory landscape. ### Legal and regulatory - **Competition law and market regulation**: active enforcement and new digital-market regulation in the EU, UK, U.S., and China; fines or conduct remedies could reduce the attractiveness of products and the revenue from them. - **AI regulation**: the EU AI Act may increase costs or affect provision of AI models and services in Europe; governments may restrict development, deployment, availability, or cross-border access to advanced models on safety or national-security grounds. - **Trade**: U.S. export controls restrict offering products/services to, and investing in, certain entities in specified countries. Microsoft states that U.S. tariffs, shifting AI export-control policy, and sanctions disagreements "has and may continue to increase operational costs, create uncertainty in the continuity of our products, and accelerate sovereignty initiatives among international partners and customers," and that tariff volatility could hit cloud and devices supply-chain cost competitiveness. The potential replacement of the rescinded AI Diffusion Rule and expanded export license conditions are named as possible adverse developments. - **Data handling**: cross-border data transfer restrictions, GDPR, and the EU Data Act. - **ESG**: emissions and energy caps, permitting, siting, and disclosure requirements; failure to meet stated sustainability goals could bring claims or reputational damage. - **Government customers**: substantial revenue comes from government contracts, exposing Microsoft to audits, potential suspension or debarment, termination without cause, and funding-approval risk. - **Intellectual property**: Microsoft is subject to "current copyright infringement and other claims arising from AI training, inference, and output," and may have to enter royalty-bearing data-access or licensing agreements on unfavorable terms, redesign affected products, or pay damages under customer indemnities. ### Tax Microsoft remains under IRS audit for tax years 2014–2017. For tax years 2004–2013 it received Notices of Proposed Adjustment on September 26, 2023, primarily on intercompany transfer pricing, in which the IRS seeks an **additional tax payment of $28.9 billion plus penalties and interest**. Microsoft disagrees and will contest through IRS administrative appeals and, if necessary, judicial proceedings; it believes its allowances for income tax contingencies are adequate as of June 30, 2026. Its effective rate benefits from earnings taxed at lower rates through its Ireland regional operations center, and Irish operations remain open to examination for tax years 2021 onward. ### General Acquisitions, joint ventures, and alliances (Activision Blizzard and the OpenAI partnership are the named examples) may not deliver expected benefits and could cause goodwill or intangible impairment. Other risks: reputation and brand damage; adverse economic conditions reducing or delaying IT spending; partner/OEM/retailer bankruptcy disrupting the sales channel; investment-portfolio losses (a significant part of the portfolio is U.S. government securities, exposed to a downgrade or default scenario); catastrophic events, with corporate headquarters and much of R&D concentrated in the seismically active Seattle area; armed conflict in Ukraine and the Middle East; pandemic; climate change; talent competition and succession planning; and international/emerging market operational risk including protectionism and currency volatility. ### Legal contingencies as disclosed The Irish Data Protection Commission's GDPR investigation into LinkedIn's targeted advertising resulted in a final decision alleging violations and assessing a fine in October 2024; LinkedIn appealed in November 2024, a preliminary hearing was held in December 2025, and the court ruled on the standard of appeal, which the IDPC may appeal. As of June 30, 2026 Microsoft had accrued aggregate legal liabilities of **$553 million**, with reasonably possible adverse outcomes of approximately **$400 million** beyond recorded amounts. --- ## Management's discussion and analysis — fiscal 2026 *From the FY2026 Form 10-K, accession 0001193125-26-323660. Compares the year ended June 30, 2026 with the year ended June 30, 2025.* ### Headline results | ($ millions, except per share) | FY2026 | FY2025 | Change | | --- | --- | --- | --- | | Revenue | 331,839 | 281,724 | +18% | | Gross margin | 225,465 | 193,893 | +16% | | Operating income | 155,237 | 128,528 | +21% | | Net income | 133,749 | 101,832 | +31% | | Diluted EPS | $17.95 | $13.64 | +32% | | Adjusted net income (non-GAAP) | 128,786 | 105,452 | +22% | | Adjusted diluted EPS (non-GAAP) | $17.28 | $14.13 | +22% | The non-GAAP measures exclude net gains and losses from investments in OpenAI. FY2026 net income and diluted EPS were **increased $5.0 billion and $0.67** by net gains from OpenAI investments; FY2025 was **reduced $3.6 billion and $0.49** by net losses. So roughly a third of the reported 31% net income growth is the swing in a non-operating, mark-to-model item — on an adjusted basis net income grew 22%. ### Management's stated drivers - Revenue up $50.1 billion or 18%, driven by Microsoft Cloud. Intelligent Cloud up on Azure; Productivity and Business Processes up on Microsoft 365 Commercial cloud; More Personal Computing down on XBOX, partly offset by Search advertising. - Cost of revenue up $18.5 billion or 21% on Microsoft Cloud growth. - Gross margin percentage decreased slightly, driven by continued AI infrastructure investment and growing AI product usage, partly offset by efficiency gains across Microsoft Cloud. **Microsoft Cloud gross margin percentage decreased to 66%.** - Operating expenses up only $4.9 billion or 7% — R&D compute capacity, AI talent and data, impairment and other related expenses in the XBOX business, commercial sales investment, and higher Copilot advertising. - Revenue and operating income each included a **favorable 2% foreign currency impact**. ### FY2026 highlights management called out - Microsoft Cloud revenue increased 27% to $214.4 billion. - Commercial remaining performance obligation increased **84% to $678 billion**. - Microsoft 365 Commercial cloud revenue increased 17%; Consumer cloud increased 28%. - LinkedIn revenue increased 11%; Dynamics 365 increased 18%. - **Azure and other cloud services revenue increased 41%.** - Windows OEM and Devices revenue decreased slightly. - XBOX content and services revenue decreased 5%. - Search advertising revenue excluding traffic acquisition costs increased 12%. ### Segment detail **Productivity and Business Processes** — revenue +$19.2 billion or 16%. Microsoft 365 Commercial products and cloud services +$14.2 billion or 16%; Commercial cloud grew 17% on revenue-per-user growth driven by Microsoft 365 Copilot and Microsoft 365 E5, with **seats up only 6%**, driven by small and medium businesses and frontline offerings — i.e., growth is now more price/mix than seat count. Commercial products revenue grew 13% on Windows Commercial on-premises components of suite sales and Office 2024 transactional purchasing. Consumer products and cloud services +$1.8 billion or 24%, with Consumer cloud +28% on revenue per user and 7% subscriber growth. LinkedIn +$2.0 billion or 11% across all lines. Dynamics +$1.2 billion or 15%, Dynamics 365 +18%. Segment operating income +$14.1 billion or 20%; gross margin percentage increased slightly on Microsoft 365 Commercial cloud efficiency gains, partly offset by AI infrastructure investment. Currency was a favorable 2/3/3 points on revenue/gross margin/operating income. **Intelligent Cloud** — revenue +$31.5 billion or 30%. Server products and cloud services +$31.0 billion or 31%, with **Azure and other cloud services +41%** on demand across all workloads. Server products revenue increased only 1%, on higher purchases of licenses running in multi-cloud environments, offset by the continued shift to cloud. Enterprise and partner services +$500 million or 6%. **Cost of revenue rose $17.7 billion or 44%** on AI infrastructure investment, so gross margin grew 21% while gross margin percentage decreased on AI infrastructure and sales mix shift to Azure, partly offset by Azure efficiency gains. Operating income +$12.4 billion or 28%. **More Personal Computing** — revenue -$597 million or 1%. Windows and Devices -$230 million or 1%: Windows OEM and Devices down slightly, with Devices declining and Windows OEM up 5% "with inventory levels that remained elevated." XBOX revenue -$1.7 billion or 7%: content and services -5% against a prior year that benefited from strong first-party content, partly offset by XBOX Game Pass growth; **XBOX hardware -29% on lower console volume**. Search advertising revenue +$1.3 billion or 9%; ex-TAC +12% on higher search volume, revenue per search, and third-party partnerships. Segment operating income +$220 million or 2%; gross margin percentage rose on mix shift to higher-margin businesses, while operating expenses rose 6% on XBOX impairment and other related expenses. ### Operating expenses | ($ millions) | FY2026 | FY2025 | Change | % of revenue FY26 / FY25 | | --- | --- | --- | --- | --- | | Research and development | 35,562 | 32,488 | +9% | 11% / 12% | | Sales and marketing | 26,710 | 25,654 | +4% | 8% / 9% | | General and administrative | 7,956 | 7,223 | +10% | 2% / 3% | R&D growth was driven by compute capacity, AI talent and data, and XBOX impairment and related expenses. G&A rose on higher legal expenses and against prior-period gains on divestitures. ### Other income (expense) and taxes Other income (expense), net swung to **+$10.7 billion in FY2026 from -$4.9 billion in FY2025**. Components: interest and dividends income $3,301 million; interest expense $(3,051) million; net recognized gains on investments $4,385 million; net gains on derivatives $1,867 million; net losses on foreign currency remeasurement $(527) million; Other, net $4,722 million. Other income included **$6.5 billion of net gains from investments in OpenAI in FY2026 versus $4.8 billion of net losses in FY2025**, with the FY2026 gain relating primarily to the dilution gain from the OpenAI recapitalization. Interest expense rose primarily on higher finance-lease interest, partly offset by higher capitalization of debt interest. Effective tax rate was 19% in FY2026 versus 18% in FY2025, the increase driven by the mix of earnings between the U.S. and foreign jurisdictions. U.S. income before income taxes was $103.6 billion and foreign income $62.3 billion (FY2025: $69.2 billion and $54.4 billion) — the U.S. share of pre-tax income rose sharply. ### Liquidity, capital, and the scale of the commitment - Cash, cash equivalents, and short-term investments **fell to $76.8 billion from $94.6 billion**. Equity and other investments rose to $36.3 billion from $15.4 billion. - **Cash from operations increased $46.8 billion to $182.9 billion.** - **Cash used in investing increased $66.9 billion to $139.5 billion**, primarily a **$51.4 billion increase in additions to property and equipment** and a $22.2 billion increase in other investing "primarily to facilitate the purchase of components," partly offset by lower acquisition and net investment activity. - **Additions to property and equipment were $115.9 billion in FY2026**, versus $64.6 billion in FY2025 and $44.5 billion in FY2024. Gross PP&E at cost reached $431.8 billion; servers, network equipment, and software alone rose to $215.9 billion from $132.8 billion. **Depreciation expense was $34.3 billion, up from $22.0 billion and $15.2 billion in the two prior years.** Purchases of PP&E still sitting in accounts payable were **$26.7 billion at June 30, 2026, versus $6.9 billion a year earlier.** - Cash used in financing was $52.5 billion. - **Contractual obligations at June 30, 2026 totaled $743.8 billion**, of which $241.9 billion is due in FY2027: long-term debt principal $46.1 billion and interest $25.6 billion; construction commitments $34.6 billion; operating and finance leases including imputed interest $443.5 billion; and purchase commitments $194.1 billion ($169.0 billion of it due in FY2027), primarily datacenter-related open purchase orders and take-or-pay contracts. - **Leases**: total finance lease liabilities reached $66.6 billion (from $46.2 billion), with finance-lease PP&E at cost of $82.7 billion; right-of-use assets obtained for finance leases were $24.6 billion in FY2026. Total finance lease cost was $8.0 billion (amortization $5.4 billion, interest $2.5 billion). Critically, **as of June 30, 2026 Microsoft had an additional $329.1 billion of leases, primarily datacenters, that had not yet commenced**, expected to commence between fiscal 2027 and fiscal 2033 with terms of 1 to 20 years, some subject to contractual conditions being met. - **Debt**: total face value of long-term debt was $46.1 billion (from $49.2 billion); total debt $40.3 billion, of which $9.2 billion current. Estimated fair value $36.5 billion. Cash paid for interest was $1.5 billion. Maturities: $9.25 billion in FY2027, then $2.0 billion in FY2029, $0.5 billion in FY2031, and $34.4 billion thereafter. - **Unearned revenue** was $75.7 billion at June 30, 2026, with $28.6 billion expected to be recognized in the quarter ending September 30, 2026. - **Remaining performance obligations**: $684 billion total, $678 billion commercial, with a weighted average duration of approximately 2.3 years; approximately **30% is expected to be recognized over the next 12 months** and the remainder thereafter. - **Capital returns**: 36 million shares repurchased for $16.7 billion in FY2026 (versus 31 million for $13.0 billion in FY2025), excluding $5.6 billion of shares repurchased to settle employee tax withholding. **$40.6 billion remained of the $60.0 billion program authorized September 16, 2024.** Dividends declared totaled $27.0 billion ($3.64 per share, versus $3.32). Shares outstanding fell to 7,427 million from 7,434 million. Total stockholders' equity rose to $442.4 billion from $343.5 billion. Management states existing cash, short-term investments, operating cash flow, and access to capital markets are expected to be sufficient to fund operations and cash commitments for at least the next 12 months and thereafter for the foreseeable future. ### Critical accounting estimates Revenue recognition (multi-element arrangements, standalone selling price, delivery pattern for Software Assurance, and estimating remaining performance obligations), measurement and impairment of investment securities (including equity-method investments that may be recorded on a lag of up to three months), goodwill (tested annually on May 1), research and development costs, legal and other contingencies, and income taxes. The auditor identified revenue recognition and uncertain tax positions related to transfer pricing as critical audit matters. --- ## Current quarter and recent trends *Fourth quarter of fiscal 2026 (quarter ended June 30, 2026) from the earnings release furnished on Form 8-K, accession 0001193125-26-323632 (July 29, 2026). Third-quarter figures from the FY26 Q3 Form 10-Q, accession 0001193125-26-191507 (April 29, 2026).* ### Q4 FY2026 (quarter ended June 30, 2026) - Revenue **$90.0 billion, up 18%** (up 17% in constant currency). - Operating income **$40.6 billion, up 18%**. - Net income **$35.8 billion, up 31%** GAAP; **$35.3 billion, up 22%** non-GAAP. - Diluted EPS **$4.81, up 32%** GAAP; **$4.74, up 23%** non-GAAP. - Microsoft Cloud revenue **$59.3 billion, up 27%**; commercial remaining performance obligation up 84% to $678 billion. Discrete items versus the guidance given April 29, 2026 produced a **$0.27 benefit to diluted EPS**: a **$3.2 billion gain from Microsoft's investment in Anthropic** and lower-than-expected expenses related to the **Voluntary Retirement Program**, partly offset by severance expense and impairment charges in XBOX. Management said that adjusting for those items, results exceeded expectations on revenue, operating income, and diluted EPS. Segment detail for the quarter: - **Productivity and Business Processes** $37.8 billion, +14%. Microsoft 365 Commercial cloud +16% adjusted for a prior-year comparable that benefited from 2 points of in-period revenue recognition (+14% reported). Microsoft 365 Consumer cloud +24% (+22% constant currency). LinkedIn +12% (+10% cc). Dynamics 365 +13% (+12% cc). - **Intelligent Cloud** $39.3 billion, +32% (+31% cc). **Azure and other cloud services +43%** — an acceleration from the 41% full-year rate. - **More Personal Computing** $12.9 billion, **-4%** (-5% cc). Windows OEM and Devices **-7%**; XBOX content and services **-10%**; Search advertising ex-TAC +10% (+9% cc). Microsoft returned $10.2 billion to shareholders in dividends and repurchases during the quarter. Management noted that **Azure revenue surpassed $100 billion for the first time this fiscal year and Microsoft 365 Copilot reached over 30 million paid seats.** Forward-looking guidance was given on the earnings call and webcast rather than in the release itself, so no numeric outlook appears in the filed materials. ### Q3 FY2026 (quarter ended March 31, 2026), for trend - Microsoft Cloud revenue up 29% to $54.5 billion. - Commercial remaining performance obligation up **99% to $627 billion**. - Microsoft 365 Commercial cloud +19%; Consumer cloud +33%; LinkedIn +12%; Dynamics 365 +22%; **Azure and other cloud services +40%**. - Windows OEM and Devices -2%; XBOX content and services -5%. - Effective tax rate 19% for the quarter and 20% for the nine months, the nine-month increase partly from deferred tax expense attributable to the OpenAI recapitalization dilution gain. - OpenAI investments produced $19 million of net losses in the quarter and $5.9 billion of net gains for the nine months; the nine-month gain related primarily to the recapitalization dilution gain. **Reading the trend across the two quarters**: Azure accelerated from 40% to 43%; Microsoft 365 Commercial cloud decelerated from 19% to 16% (adjusted); Consumer cloud from 33% to 24%; Dynamics 365 from 22% to 13%; the More Personal Computing decline steepened, with Windows OEM and Devices moving from -2% to -7% and XBOX content and services from -5% to -10%. Commercial RPO growth moderated from +99% to +84%, though the absolute figure rose from $627 billion to $678 billion. --- ## Subsequent events *Reviewed in the FY2026 Form 10-K, accession 0001193125-26-323660, and the FY26 Q3 Form 10-Q, accession 0001193125-26-191507.* **Neither the FY2026 Form 10-K nor the FY26 Q3 Form 10-Q contains a subsequent-events note.** The notes to the FY2026 financial statements run from Note 1 (Accounting Policies) through Note 18 (Segment Information and Geographic Data), and no separate subsequent-events disclosure appears in either filing. Accordingly, **no post-period acquisition, divestiture, debt or equity financing, or litigation settlement is disclosed** for the period between June 30, 2026 and the July 29, 2026 filing date. The only forward-dated items disclosed in the filings, and the board changes reported separately on Form 8-K, are: - **Dividend declared but unpaid at year-end.** The Board declared a quarterly dividend of **$0.91 per share ($6,759 million)** on June 10, 2026, with a **record date of August 20, 2026 and a payment date of September 10, 2026**. It was included in other current liabilities as of June 30, 2026. - **Share repurchase capacity carried forward.** $40.6 billion remained available under the $60.0 billion program approved September 16, 2024, which has no expiration date. - **Leases not yet commenced.** $329.1 billion of leases, primarily datacenters, had not commenced as of June 30, 2026 and will commence between fiscal 2027 and fiscal 2033. - **Near-term contractual obligations.** $241.9 billion of contractual obligations comes due in fiscal 2027, including $169.0 billion of purchase commitments, $29.8 billion of construction commitments, and $9.25 billion of long-term debt principal. - **Board composition.** As reported on Form 8-K, Carmine Di Sibio was appointed to the Board effective May 13, 2026 (announced May 14, 2026). On June 2, 2026, Reid Hoffman, a director since 2017, informed the company he would **not stand for re-election at the 2026 annual shareholder meeting**, a future event; he continues to serve until that meeting, and the company stated his decision did not result from any disagreement with management. - **Open tax exposure carried forward.** The IRS Notices of Proposed Adjustment for tax years 2004–2013 seeking $28.9 billion plus penalties and interest remain unresolved, as does the IRS audit of tax years 2014–2017.