Item 6. [RESERVED]

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of our operations for the year ended June 30, 2026 compared to the year ended June 30, 2025. For a discussion of the year ended June 30, 2025 compared to the year ended June 30, 2024, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2025.

OVERVIEW

Microsoft is a technology company committed to making digital technology and artificial intelligence (“AI”) available broadly and doing so responsibly, with a mission to empower every person and every organization on the planet to achieve more. We create platforms and applications, powered by AI, that deliver innovative solutions that meet the evolving needs of our customers.

We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes.

Highlights from fiscal year 2026 compared with fiscal year 2025 included:

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%.

Microsoft 365 Consumer cloud revenue increased 28%.

LinkedIn revenue increased 11%.

Dynamics 365 revenue 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 (formerly Search and news advertising) revenue excluding traffic acquisition costs increased 12%.

Industry Trends and Opportunities

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.

We have a long-term strategic partnership with OpenAI which was originally established in 2019. In October 2025 and April 2026, we extended this partnership and continue to build on our shared vision to advance artificial intelligence responsibly and make its benefits broadly accessible. Microsoft is a major investor in OpenAI and will continue to receive revenue-sharing payments. We hold rights to OpenAI’s intellectual property, including models and infrastructure, for integration into our products.

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Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use. Aggregate demand for our software, services, and devices is also correlated to global macroeconomic and geopolitical factors, which remain dynamic. We must continue to evolve and adapt over an extended time in pace with this changing environment.

The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units and other components. Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended or unforeseen disruptions, or limited availability of components from these suppliers could impact our ability to operate our datacenters and manufacture devices on time to meet consumer demand.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.

Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies increased reported revenue and did not have a material impact on reported expenses from our international operations in fiscal year 2026.

Further, global, regional, and local economic developments and changes in global trade policies such as restrictions on international trade, including tariffs and other controls on imports or exports, could result in increased supply chain challenges, cost volatility, and consumer and economic uncertainty which may adversely affect our results of operations.

Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.

Seasonality

Our revenue fluctuates quarterly and is generally higher in the fourth quarter of our fiscal year. Fourth quarter revenue is driven by a higher volume of multi-year contracts executed during the period.

Reportable Segments

We report our financial performance based on the following three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting.

Additional information on our reportable segments is contained in Note 18 – Segment Information and Geographic Data of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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Metrics

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year.

In the first quarter of fiscal year 2026, we made updates to our metrics to align with how we manage and monitor certain businesses. As part of these updates, Microsoft 365 Consumer subscribers was removed as a metric.

Commercial

Our commercial business primarily consists of Server products and cloud services, Microsoft 365 Commercial products and cloud services, the commercial portion of LinkedIn, Dynamics products and cloud services, and Enterprise and partner services. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

Commercial remaining performance obligation		Commercial portion of revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods
Microsoft Cloud revenue and revenue growth		Revenue from Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365
Microsoft Cloud gross margin percentage		Gross margin percentage for our Microsoft Cloud business

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics primarily reflect growth across our cloud services.

Microsoft 365 Commercial cloud revenue growth		Revenue from Microsoft 365 Commercial subscriptions, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot
Microsoft 365 Commercial seat growth		The number of Microsoft 365 Commercial seats at end of period where seats are paid users covered by a Microsoft 365 Commercial subscription
Microsoft 365 Consumer cloud revenue growth		Revenue from Microsoft 365 Consumer subscriptions and other consumer services
LinkedIn revenue growth		Revenue from LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions
Dynamics 365 revenue growth		Revenue from Dynamics 365, including a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate
Azure and other cloud services revenue growth		Revenue from Azure and other cloud services, including cloud and AI consumption-based services, GitHub cloud services, Health and Life Sciences cloud services (formerly Nuance Healthcare cloud services), virtual desktop offerings, and other cloud services

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More Personal Computing

Metrics related to our More Personal Computing segment assess the performance of our key consumer businesses.

Windows OEM and Devices revenue growth		Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel and sales of first-party Devices, including Surface and PC accessories
XBOX content and services revenue growth		Revenue from XBOX content and services, comprising first- and third-party content (including games and in-game content), XBOX Game Pass and other subscriptions, XBOX Cloud Gaming, advertising, and other cloud services
Search advertising revenue (ex TAC) growth		Revenue from search advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and content partners

SUMMARY RESULTS OF OPERATIONS

(In millions, except percentages and per share amounts)		2026				2025				Percentage 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 earnings per share			17.95				13.64				32%
Adjusted net income (non-GAAP)			128,786				105,452				22%
Adjusted diluted earnings per share (non-GAAP)			17.28				14.13				22%

Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.

Fiscal Year 2026 Compared with Fiscal Year 2025

Revenue increased $50.1 billion or 18% driven by growth in Microsoft Cloud. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud. More Personal Computing revenue decreased driven by XBOX (formerly Gaming), offset in part by growth in Search advertising.

Cost of revenue increased $18.5 billion or 21% driven by growth in Microsoft Cloud.

Gross margin increased $31.6 billion or 16% with growth across each of our segments.

Gross margin percentage decreased slightly driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud.

Microsoft Cloud gross margin percentage decreased to 66% driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud.

Operating expenses increased $4.9 billion or 7% driven by continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio, impairment and other related expenses in our XBOX business, investments in commercial sales, and higher Copilot advertising expenses.

Operating income increased $26.7 billion or 21% driven by growth in Productivity and Business Processes and Intelligent Cloud.

Revenue and operating income both included a favorable foreign currency impact of 2%.

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Current year net income and diluted EPS were positively impacted by net gains from investments in OpenAI, which resulted in an increase in net income and diluted EPS of $5.0 billion and $0.67, respectively. Prior year net income and diluted EPS were negatively impacted by net losses from investments in OpenAI, which resulted in a decrease in net income and diluted EPS of $3.6 billion and $0.49, respectively.

SEGMENT RESULTS OF OPERATIONS

(In millions, except percentages)		2026				2025				Percentage Change
Productivity and Business Processes
Revenue		$	139,996			$	120,810				16%
Cost of revenue			25,017				22,422				12%
Operating expenses			31,100				28,615				9%
Operating income		$	83,879			$	69,773				20%
Intelligent Cloud
Revenue		$	137,791			$	106,265				30%
Cost of revenue			57,876				40,171				44%
Operating expenses			22,943				21,505				7%
Operating income		$	56,972			$	44,589				28%
More Personal Computing
Revenue		$	54,052			$	54,649				(1)%
Cost of revenue			23,481				25,238				(7)%
Operating expenses			16,185				15,245				6%
Operating income		$	14,386			$	14,166				2%
Total
Revenue		$	331,839			$	281,724				18%
Cost of revenue			106,374				87,831				21%
Operating expenses			70,228				65,365				7%
Operating income		$	155,237			$	128,528				21%

Reportable Segments

Fiscal Year 2026 Compared with Fiscal Year 2025

Productivity and Business Processes

Revenue increased $19.2 billion or 16%.

Microsoft 365 Commercial products and cloud services revenue increased $14.2 billion or 16%. Microsoft 365 Commercial cloud revenue grew 17% with growth in revenue per user driven by Microsoft 365 Copilot and Microsoft 365 E5. Microsoft 365 Commercial seats grew 6% driven by small and medium businesses and frontline worker offerings. Microsoft 365 Commercial products revenue grew 13% driven by growth in the Windows Commercial on-premises components of Microsoft 365 suite sales, as well as an increase in Office 2024 transactional purchasing.

Microsoft 365 Consumer products and cloud services revenue increased $1.8 billion or 24%. Microsoft 365 Consumer cloud revenue grew 28% driven by growth in revenue per user and Microsoft 365 Consumer subscriber growth of 7%.

LinkedIn revenue increased $2.0 billion or 11% with growth across all lines of business.

Dynamics products and cloud services revenue increased $1.2 billion or 15% driven by growth in Dynamics 365. Dynamics 365 revenue grew 18% with growth across all workloads.

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Operating income increased $14.1 billion or 20%.

Cost of revenue increased $2.6 billion or 12% driven by investments in AI infrastructure to support Microsoft 365 Copilot seat and usage growth.

Gross margin increased $16.6 billion or 17% driven by growth in Microsoft 365 Commercial cloud. Gross margin percentage increased slightly primarily driven by efficiency gains in Microsoft 365 Commercial cloud, offset in part by continued investments in AI infrastructure and growing AI product usage.

Operating expenses increased $2.5 billion or 9% driven by continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio, as well as investments in commercial sales and higher Copilot advertising expenses.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 3%, and 3%, respectively.

Intelligent Cloud

Revenue increased $31.5 billion or 30%.

Server products and cloud services revenue increased $31.0 billion or 31% driven by Azure and other cloud services. Azure and other cloud services revenue grew 41% driven by demand for services across the platform with continued growth across all workloads. Server products revenue increased 1% primarily driven by higher purchases of licenses running in multi-cloud environments, offset in part by continued customer shift to cloud.

Enterprise and partner services revenue increased $500 million or 6% driven by growth in Enterprise Support Services.

Operating income increased $12.4 billion or 28%.

Cost of revenue increased $17.7 billion or 44% driven by investments in AI infrastructure to support growing customer demand.

Gross margin increased $13.8 billion or 21% driven by growth in Azure. Gross margin percentage decreased driven by the continued investments in AI infrastructure as well as sales mix shift to Azure, offset in part by efficiency gains in Azure.

Operating expenses increased $1.4 billion or 7% driven by continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio.

Cost of revenue included an unfavorable foreign currency impact of 2%.

More Personal Computing

Revenue decreased $597 million or 1%.

Windows and Devices revenue decreased $230 million or 1%. Windows OEM and Devices revenue decreased slightly driven by a decline in Devices, offset in part by Windows OEM growth of 5% with inventory levels that remained elevated.

XBOX revenue decreased $1.7 billion or 7% driven by declines in XBOX content and services and XBOX hardware. XBOX content and services revenue decreased 5% on a prior year comparable that benefited from strong first-party content performance, offset in part by growth in XBOX Game Pass. XBOX hardware revenue decreased 29% driven by lower volume of consoles sold.

Search advertising revenue increased $1.3 billion or 9%. Search advertising revenue excluding traffic acquisition costs increased 12% driven by higher search volume and revenue per search, as well as benefit from third-party partnerships.

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Operating income increased $220 million or 2%.

Cost of revenue decreased $1.8 billion or 7% driven by lower hardware sales.

Gross margin increased $1.2 billion or 4% driven by growth in Search advertising and Windows OEM. Gross margin percentage increased driven by sales mix shift to higher margin businesses.

Operating expenses increased $940 million or 6% driven by impairment and other related expenses in our XBOX business and continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio.

Operating income included a favorable foreign currency impact of 2%.

OPERATING EXPENSES

Research and Development

(In millions, except percentages)		2026				2025				Percentage Change
Research and development		$	35,562			$	32,488				9%
As a percent of revenue			11%				12%				(1)ppt

Research and development expenses include payroll, stock-based compensation expense, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include technology development costs, including AI training and other infrastructure costs, third-party development and programming costs, and the depreciation and amortization of assets used to conduct research and development.

Fiscal Year 2026 Compared with Fiscal Year 2025

Research and development expenses increased $3.1 billion or 9% driven by continued investments in compute capacity, AI talent, and data to support product development that benefits the entire portfolio, as well as impairment and other related expenses in our XBOX business.

Sales and Marketing

(In millions, except percentages)		2026				2025				Percentage Change
Sales and marketing		$	26,710			$	25,654				4%
As a percent of revenue			8%				9%				(1)ppt

Sales and marketing expenses include payroll, stock-based compensation expense, employee benefits, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.

Fiscal Year 2026 Compared with Fiscal Year 2025

Sales and marketing expenses increased $1.1 billion or 4% driven by investments in commercial sales and higher Copilot advertising expenses.

General and Administrative

(In millions, except percentages)		2026				2025				Percentage Change
General and administrative		$	7,956			$	7,223				10%
As a percent of revenue			2%				3%				(1)ppt

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

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Fiscal Year 2026 Compared with Fiscal Year 2025

General and administrative expenses increased $733 million or 10% driven by higher legal expenses and gains on divestitures in the prior period.

OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)
Year Ended June 30,			2026				2025
Interest and dividends income		$	3,301			$	2,647
Interest expense			(3,051	)			(2,385	)
Net recognized gains (losses) on investments			4,385				(349	)
Net gains (losses) on derivatives			1,867				(260	)
Net gains (losses) on foreign currency remeasurements			(527	)			171
Other, net			4,722				(4,725	)
Total		$	10,697			$	(4,901	)

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Other income (expense), net included $6.5 billion of net gains and $4.8 billion of net losses for fiscal years 2026 and 2025, respectively, from investments in OpenAI, primarily net recognized gains (losses) on our equity method investment reflected in Other, net. The net gains recorded for fiscal year 2026 primarily relate to the dilution gain from the OpenAI Recapitalization.

Fiscal Year 2026 Compared with Fiscal Year 2025

Interest and dividends income increased primarily due to higher portfolio balances and higher yields on debt securities. Interest expense increased primarily due to higher finance lease interest expense, offset in part by higher capitalization of debt interest expense. Net recognized gains on investments increased primarily due to higher gains on equity securities and lower impairments in the current period. Net gains on derivatives increased primarily due to gains on equity derivatives in the current period as compared to losses in the prior period. Other, net primarily reflects net recognized gains on equity method investments, including OpenAI.

INCOME TAXES

Effective Tax Rate

Our effective tax rate for fiscal years 2026 and 2025 was 19% and 18%, respectively. The increase in our effective tax rate was primarily due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.

Our effective tax rate was lower than the U.S. federal statutory rate, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland.

The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2026, our U.S. income before income taxes was $103.6 billion and our foreign income before income taxes was $62.3 billion. In fiscal year 2025, our U.S. income before income taxes was $69.2 billion and our foreign income before income taxes was $54.4 billion.

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Uncertain Tax Positions

We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of June 30, 2026, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings.

We are subject to income tax in many jurisdictions outside the U.S., some of which are currently under audit by local tax authorities. The resolution of these audits is not expected to be material to our consolidated financial statements. Our operations in Ireland remain subject to examination for tax years 2021 and thereafter.

NON-GAAP FINANCIAL MEASURES

Adjusted other income (expense), net, adjusted net income, and adjusted diluted EPS are non-GAAP financial measures which exclude net (gains) losses from investments in OpenAI. We believe these non-GAAP measures aid investors by providing additional insight into our financial performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:

(In millions, except percentages and per share amounts)		2026				2025					2024			Percentage Change 2026 Versus 2025			Percentage Change 2025 Versus 2024
Other income (expense), net		$	10,697			$	(4,901	)		$	(1,646	)		318%			(198)%
Net (gains) losses from investments in OpenAI			(6,530	)			4,763				1,482			(237)%			221%
Adjusted other income (expense), net (non-GAAP)		$	4,167			$	(138	)		$	(164	)		3,120%			16%
Net income		$	133,749			$	101,832			$	88,136			31%			16%
Net (gains) losses from investments in OpenAI, net of tax of $1,567, $(1,143), and $(356)			(4,963	)			3,620				1,126			(237)%			221%
Adjusted net income (non-GAAP)		$	128,786			$	105,452			$	89,262			22%			18%
Diluted earnings per share		$	17.95			$	13.64			$	11.80			32%			16%
Net (gains) losses from investments in OpenAI			(0.67	)			0.49				0.15			(237)%			227%
Adjusted diluted earnings per share (non-GAAP)		$	17.28			$	14.13			$	11.95			22%			18%

LIQUIDITY AND CAPITAL RESOURCES

We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.

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