filings.toolsItem 1. Unrealized Losses on Debt Investments
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Item 1. Unrealized Losses on Debt Investments
Unrealized Losses on Debt Investments
Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
| Less than 12 Months | 12 Months or Greater | Total Unrealized Losses | ||||||||||||||||||||||
| (In millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Total Fair Value | |||||||||||||||||||
| September 30, 2025 | ||||||||||||||||||||||||
| U.S. government and agency securities | $ | 312 | $ | **(**52 | ) | $ | 32,625 | $ | **(**1,186 | ) | $ | 32,937 | $ | **(**1,238 | ) | |||||||||
| Foreign government bonds | 45 | **(**2 | ) | 105 | **(**4 | ) | 150 | **(**6 | ) | |||||||||||||||
| Mortgage- and asset-backed securities | 0 | 0 | 264 | **(**23 | ) | 264 | **(**23 | ) | ||||||||||||||||
| Corporate notes and bonds | 285 | **(**1 | ) | 2,718 | **(**69 | ) | 3,003 | **(**70 | ) | |||||||||||||||
| Municipal securities | 0 | 0 | 167 | **(**19 | ) | 167 | **(**19 | ) | ||||||||||||||||
| Total | $ | 642 | $ | **(**55 | ) | $ | 35,879 | $ | **(**1,301 | ) | $ | 36,521 | $ | **(**1,356 | ) | |||||||||
| Less than 12 Months | 12 Months or Greater | Total Unrealized Losses | ||||||||||||||||||||||
| (In millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Total Fair Value | |||||||||||||||||||
| June 30, 2025 | ||||||||||||||||||||||||
| U.S. government and agency securities | $ | 2,569 | $ | (51 | ) | $ | 34,608 | $ | (1,411 | ) | $ | 37,177 | $ | (1,462 | ) | |||||||||
| Foreign government bonds | 43 | (2 | ) | 106 | (7 | ) | 149 | (9 | ) | |||||||||||||||
| Mortgage- and asset-backed securities | 841 | (4 | ) | 189 | (23 | ) | 1,030 | (27 | ) | |||||||||||||||
| Corporate notes and bonds | 1,107 | (8 | ) | 3,105 | (98 | ) | 4,212 | (106 | ) | |||||||||||||||
| Municipal securities | 0 | 0 | 168 | (21 | ) | 168 | (21 | ) | ||||||||||||||||
| Total | $ | 4,560 | $ | (65 | ) | $ | 38,176 | $ | (1,560 | ) | $ | 42,736 | $ | (1,625 | ) | |||||||||
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.
Debt Investment Maturities
The following table outlines maturities of our debt investments as of September 30, 2025:
| (In millions) | Adjusted Cost Basis | Estimated Fair Value | ||||||
| September 30, 2025 | ||||||||
| Due in one year or less | $ | 37,304 | $ | 37,200 | ||||
| Due after one year through five years | 48,228 | 47,466 | ||||||
| Due after five years through 10 years | 5,397 | 5,877 | ||||||
| Due after 10 years | 1,472 | 1,397 | ||||||
| Total | $ | 92,401 | $ | 91,940 | ||||
NOTE 5 — DERIVATIVES
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. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.
Foreign Currencies
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.
PART I
Item 1
Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.
Interest Rate
Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Equity
Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments.
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.
Credit-Risk-Related Contingent Features
Certain counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of September 30, 2025, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:
| (In millions) | September 30, 2025 | June 30, 2025 | ||||||
| Designated as Hedging Instruments | ||||||||
| Foreign exchange contracts purchased | $ | 1,492 | $ | 1,492 | ||||
| Interest rate contracts purchased | 1,167 | 1,150 | ||||||
| Not Designated as Hedging Instruments | ||||||||
| Foreign exchange contracts purchased | 11,810 | 15,214 | ||||||
| Foreign exchange contracts sold | 33,053 | 43,307 | ||||||
| Equity contracts purchased | 5,766 | 5,434 | ||||||
| Equity contracts sold | 2,189 | 2,189 | ||||||
| Other contracts purchased | 2,668 | 2,769 | ||||||
| Other contracts sold | 836 | 1,242 | ||||||
PART I
Item 1
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
| (In millions) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
| September 30, 2025 | June 30, 2025 | |||||||||||||||
| Designated as Hedging Instruments | ||||||||||||||||
| Foreign exchange contracts | $ | 83 | $ | **(**48 | ) | $ | 89 | $ | (44 | ) | ||||||
| Interest rate contracts | 6 | 0 | 15 | 0 | ||||||||||||
| Not Designated as Hedging Instruments | ||||||||||||||||
| Foreign exchange contracts | 202 | **(**397 | ) | 248 | (809 | ) | ||||||||||
| Equity contracts | 1,274 | **(**353 | ) | 385 | (983 | ) | ||||||||||
| Other contracts | 10 | **(**6 | ) | 21 | (1 | ) | ||||||||||
| Gross amounts of derivatives | 1,575 | **(**804 | ) | 758 | (1,837 | ) | ||||||||||
| Gross amounts of derivatives offset in the balance sheets | **(**247 | ) | 248 | (258 | ) | 260 | ||||||||||
| Cash collateral received | 0 | **(**67 | ) | 0 | (99 | ) | ||||||||||
| Net amounts of derivatives | $ | 1,328 | $ | **(**623 | ) | $ | 500 | $ | (1,676 | ) | ||||||
| Reported as | ||||||||||||||||
| Short-term investments | $ | 7 | $ | 0 | $ | 10 | $ | 0 | ||||||||
| Other current assets | 132 | 0 | 201 | 0 | ||||||||||||
| Equity and other investments | 1,182 | 0 | 272 | 0 | ||||||||||||
| Other long-term assets | 7 | 0 | 17 | 0 | ||||||||||||
| Other current liabilities | 0 | **(**570 | ) | 0 | (1,639 | ) | ||||||||||
| Other long-term liabilities | 0 | **(**53 | ) | 0 | (37 | ) | ||||||||||
| Total | $ | 1,328 | $ | **(**623 | ) | $ | 500 | $ | (1,676 | ) | ||||||
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $376 million and $802 million, respectively, as of September 30, 2025, and $452 million and $1.8 billion, respectively, as of June 30, 2025.
The following table presents the fair value of our derivatives instruments on a gross basis:
| (In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| September 30, 2025 | ||||||||||||||||
| Derivative assets | $ | 0 | $ | 388 | $ | 1,187 | $ | 1,575 | ||||||||
| Derivative liabilities | 0 | **(**804 | ) | 0 | **(**804 | ) | ||||||||||
| June 30, 2025 | ||||||||||||||||
| Derivative assets | 1 | 474 | 283 | 758 | ||||||||||||
| Derivative liabilities | 0 | (1,832 | ) | (5 | ) | (1,837 | ) | |||||||||
PART I
Item 1
Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Designated as Fair Value Hedging Instruments | ||||||||
| Interest rate contracts | ||||||||
| Derivatives | $ | **(**1 | ) | $ | 20 | |||
| Hedged items | **(**8 | ) | (32 | ) | ||||
| Designated as Cash Flow Hedging Instruments | ||||||||
| Foreign exchange contracts | ||||||||
| Amount reclassified from accumulated other comprehensive loss | **(**5 | ) | 49 | |||||
| Not Designated as Hedging Instruments | ||||||||
| Foreign exchange contracts | 381 | (383 | ) | |||||
| Equity contracts | 1,579 | (348 | ) | |||||
| Other contracts | 0 | 24 | ||||||
Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Designated as Cash Flow Hedging Instruments | ||||||||
| Foreign exchange contracts | ||||||||
| Included in effectiveness assessment | $ | **(**7 | ) | $ | 29 | |||
NOTE 6 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) | ||||||||
| September 30, 2025 | June 30, 2025 | |||||||
| Land | $ | 9,450 | $ | 9,338 | ||||
| Buildings and improvements | 152,433 | 137,921 | ||||||
| Leasehold improvements | 13,610 | 12,117 | ||||||
| Servers, network equipment, and software | 147,701 | 132,836 | ||||||
| Furniture and equipment | 6,547 | 6,407 | ||||||
| Total, at cost | 329,741 | 298,619 | ||||||
| Accumulated depreciation | **(**98,880 | ) | (93,653 | ) | ||||
| Total, net | $ | 230,861 | $ | 204,966 | ||||
Depreciation expense was $7.1 billion and $4.7 billion for the three months ended September 30, 2025 and 2024, respectively.
As of September 30, 2025 and June 30, 2025, purchases of property and equipment remaining in accounts payable were $18.6 billion and $6.9 billion, respectively.
PART I
Item 1
NOTE 7 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) | June 30, 2025 | Acquisitions | Other | September 30, 2025 | ||||||||||||
| Productivity and Business Processes | $ | 31,457 | $ | 0 | $ | 1 | $ | 31,458 | ||||||||
| Intelligent Cloud | 25,689 | 0 | **(**7 | ) | 25,682 | |||||||||||
| More Personal Computing | 62,363 | 0 | **(**6 | ) | 62,357 | |||||||||||
| Total | $ | 119,509 | $ | 0 | $ | **(**12 | ) | $ | 119,497 | |||||||
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.
NOTE 8 — INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
| (In millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| September 30, 2025 | June 30, 2025 | |||||||||||||||||||||||
| Marketing-related | $ | 16,502 | $ | **(**4,101 | ) | $ | 12,401 | $ | 16,502 | $ | (3,901 | ) | $ | 12,601 | ||||||||||
| Technology-based | 22,642 | **(**16,056 | ) | 6,586 | 22,560 | (14,959 | ) | 7,601 | ||||||||||||||||
| Customer-related | 4,278 | **(**2,204 | ) | 2,074 | 4,278 | (2,050 | ) | 2,228 | ||||||||||||||||
| Contract-based | 230 | **(**55 | ) | 175 | 217 | (43 | ) | 174 | ||||||||||||||||
| Total | $ | 43,652 | $ | **(**22,416 | ) | $ | 21,236 | $ | 43,557 | $ | (20,953 | ) | $ | 22,604 | ||||||||||
Intangible assets amortization expense was $1.5 billion and $1.4 billion for the three months ended September 30, 2025 and 2024, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2025:
| (In millions) | ||||
| Year Ending June 30, | ||||
| 2026 (excluding the three months ended September 30, 2025) | $ | 3,186 | ||
| 2027 | 2,932 | |||
| 2028 | 2,038 | |||
| 2029 | 1,853 | |||
| 2030 | 1,385 | |||
| Thereafter | 9,842 | |||
| Total | $ | 21,236 | ||
PART I
Item 1
NOTE 9 — DEBT
The components of long-term debt were as follows:
| (In millions, issuance by calendar year) | Maturities (calendar year) | Stated Interest Rate | Effective Interest Rate | September 30, 2025 | June 30, 2025 | |||||||||||||||||||
| 2009 issuance of $3.8 billion | 2039 | 5.20**%** | 5.24**%** | $ | 520 | $ | 520 | |||||||||||||||||
| 2010 issuance of $4.8 billion | 2040 | 4.50**%** | 4.57**%** | 486 | 486 | |||||||||||||||||||
| 2011 issuance of $2.3 billion | 2041 | 5.30**%** | 5.36**%** | 718 | 718 | |||||||||||||||||||
| 2012 issuance of $2.3 billion | 2042 | 3.50**%** | 3.57**%** | 454 | 454 | |||||||||||||||||||
| 2013 issuance of $5.2 billion | 2043 | 3.75**%** | – | 4.88**%** | 3.83**%** | – | 4.92**%** | 314 | 314 | |||||||||||||||
| 2013 issuance of €4.1 billion | 2028 | – | 2033 | 2.63**%** | – | 3.13**%** | 2.69**%** | – | 3.22**%** | 2,702 | 2,700 | |||||||||||||
| 2015 issuance of $23.8 billion | 2025 | – | 2055 | 3.13**%** | – | 4.75**%** | 3.18**%** | – | 4.78**%** | 7,555 | 7,555 | |||||||||||||
| 2016 issuance of $19.8 billion | 2026 | – | 2056 | 2.40**%** | – | 3.95**%** | 2.46**%** | – | 4.03**%** | 7,930 | 7,930 | |||||||||||||
| 2017 issuance of $17.1 billion | 2026 | – | 2057 | 3.30**%** | – | 4.50**%** | 3.38**%** | – | 5.49**%** | 6,833 | 6,833 | |||||||||||||
| 2020 issuance of $10.1 billion | 2030 | – | 2060 | 1.35**%** | – | 2.68**%** | 2.53**%** | – | 5.43**%** | 10,111 | 10,111 | |||||||||||||
| 2021 issuance of $8.2 billion | 2052 | – | 2062 | 2.92**%** | – | 3.04**%** | 2.92**%** | – | 3.04**%** | 8,185 | 8,185 | |||||||||||||
| 2023 issuance of $0.1 billion | 2026 | – | 2050 | 1.35**%** | – | 4.50**%** | 5.16**%** | – | 5.49**%** | 56 | 56 | |||||||||||||
| 2024 issuance of $3.3 billion | 2026 | – | 2050 | 1.35**%** | – | 4.50**%** | 5.16**%** | – | 5.49**%** | 3,344 | 3,344 | |||||||||||||
| Total face value | 49,208 | 49,206 | ||||||||||||||||||||||
| Unamortized discount and issuance costs | **(**1,136 | ) | (1,155 | ) | ||||||||||||||||||||
| Hedge fair value adjustments (a) | **(**28 | ) | (36 | ) | ||||||||||||||||||||
| Premium on debt exchange | **(**4,836 | ) | (4,864 | ) | ||||||||||||||||||||
| Total debt | 43,208 | 43,151 | ||||||||||||||||||||||
| Current portion of long-term debt | **(**7,832 | ) | (2,999 | ) | ||||||||||||||||||||
| Long-term debt | $ | 35,376 | $ | 40,152 | ||||||||||||||||||||
(a)
Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.
As of September 30, 2025 and June 30, 2025, the estimated fair value of long-term debt, including the current portion, was $40.9 billion and $40.4 billion, respectively. The estimated fair values are based on Level 2 inputs.
Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually.
The following table outlines maturities of our long-term debt, including the current portion, as of September 30, 2025:
| (In millions) | ||||
| Year Ending June 30, | ||||
| 2026 (excluding the three months ended September 30, 2025) | $ | 3,000 | ||
| 2027 | 9,250 | |||
| 2028 | 0 | |||
| 2029 | 2,056 | |||
| 2030 | 0 | |||
| Thereafter | 34,902 | |||
| Total | $ | 49,208 | ||
NOTE 10 — INCOME TAXES
Effective Tax Rate
Our effective tax rate was 19% for both the three months ended September 30, 2025 and 2024. Our effective tax rate for the three months ended September 30, 2025 was relatively unchanged compared to prior year as U.S. tax law changes from the One Big Beautiful Bill Act enacted on July 4, 2025 were offset by changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.
PART I
Item 1
Our effective tax rate was lower than the U.S. federal statutory rate for the three months ended September 30, 2025, 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.
Uncertain Tax Positions
As of September 30, 2025 and June 30, 2025, unrecognized tax benefits and other income tax liabilities were $28.0 billion and $27.4 billion, respectively, and are included in long-term income taxes in our consolidated balance sheets.
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 September 30, 2025, 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 do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months.
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 2020 and thereafter.
NOTE 11 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) | ||||||||
| September 30, 2025 | June 30, 2025 | |||||||
| Productivity and Business Processes | $ | 46,357 | $ | 50,567 | ||||
| Intelligent Cloud | 12,659 | 14,022 | ||||||
| More Personal Computing | 2,517 | 2,676 | ||||||
| Total | $ | 61,533 | $ | 67,265 | ||||
Changes in unearned revenue were as follows:
| (In millions) | ||||
| Three Months Ended September 30, 2025 | ||||
| Balance, beginning of period | $ | 67,265 | ||
| Deferral of revenue | 44,297 | |||
| Recognition of unearned revenue | **(**50,029 | ) | ||
| Balance, end of period | $ | 61,533 | ||
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $398 billion as of September 30, 2025, of which $392 billion is related to the commercial portion of revenue. We expect to recognize approximately 40% of our total company remaining performance obligation revenue over the next 12 months and the remainder thereafter.
NOTE 12 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
PART I
Item 1
The components of lease expense were as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Operating lease cost | $ | 1,656 | $ | 1,161 | ||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | 1,173 | $ | 696 | ||||
| Interest on lease liabilities | 546 | 275 | ||||||
| Total finance lease cost | $ | 1,719 | $ | 971 | ||||
Supplemental cash flow information related to leases was as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 1,656 | $ | 1,207 | ||||
| Operating cash flows from finance leases | 546 | 275 | ||||||
| Financing cash flows from finance leases | 639 | 802 | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | 1,417 | 1,892 | ||||||
| Finance leases | 9,147 | 4,332 | ||||||
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) | ||||||||
| September 30, 2025 | June 30, 2025 | |||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | 24,791 | $ | 24,823 | ||||
| Other current liabilities | $ | 5,385 | $ | 5,424 | ||||
| Operating lease liabilities | 17,348 | 17,437 | ||||||
| Total operating lease liabilities | $ | 22,733 | $ | 22,861 | ||||
| Finance Leases | ||||||||
| Property and equipment, at cost | $ | 66,435 | $ | 53,876 | ||||
| Accumulated depreciation | **(**11,330 | ) | (9,861 | ) | ||||
| Property and equipment, net | $ | 55,105 | $ | 44,015 | ||||
| Other current liabilities | $ | 3,435 | $ | 3,172 | ||||
| Other long-term liabilities | 50,999 | 43,000 | ||||||
| Total finance lease liabilities | $ | 54,434 | $ | 46,172 | ||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | 6 years | 6 years | ||||||
| Finance leases | 13 years | 13 years | ||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | 3.6**%** | 3.5% | ||||||
| Finance leases | 4.3**%** | 4.2% | ||||||
PART I
Item 1
The following table outlines maturities of our lease liabilities as of September 30, 2025:
| (In millions) | ||||||||
| Year Ending June 30, | Operating Leases | Finance Leases | ||||||
| 2026 (excluding the three months ended September 30, 2025) | $ | 4,627 | $ | 4,218 | ||||
| 2027 | 5,506 | 5,862 | ||||||
| 2028 | 3,770 | 5,909 | ||||||
| 2029 | 2,641 | 5,259 | ||||||
| 2030 | 2,162 | 5,136 | ||||||
| Thereafter | 6,586 | 46,450 | ||||||
| Total lease payments | 25,292 | 72,834 | ||||||
| Less imputed interest | **(**2,559 | ) | **(**18,400 | ) | ||||
| Total | $ | 22,733 | $ | 54,434 | ||||
As of September 30, 2025, we had additional leases, primarily for datacenters, that had not yet commenced of $106.2 billion. These leases will commence between fiscal year 2026 and fiscal year 2031 with lease terms of 1 year to 20 years.
NOTE 13 — CONTINGENCIES
Irish Data Protection Commission Matter
In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In October 2024, the IDPC provided LinkedIn with a final decision alleging GDPR violations and assessing a fine. In November 2024, LinkedIn appealed the final decision to the Irish courts, and the next hearing is scheduled for December 2025.
Other Contingencies
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
As of September 30, 2025, we accrued aggregate legal liabilities of $530 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $300 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.
NOTE 14 — STOCKHOLDERS’ EQUITY
Share Repurchases
On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021 and was completed in April 2025.
On September 16, 2024, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in April 2025, following completion of the program approved on September 14, 2021, has no expiration date, and may be terminated at any time. As of September 30, 2025, $53.4 billion remained of this $60.0 billion share repurchase program.
PART I
Item 1
We repurchased the following shares of common stock under the share repurchase programs:
| (In millions) | Shares | Amount | Shares | Amount | ||||||||||||
| Fiscal Year | 2026 | 2025 | ||||||||||||||
| First Quarter | 8 | $ | 3,955 | 7 | $ | 2,800 | ||||||||||
All repurchases were made using cash resources. Shares repurchased during the first quarter of fiscal year 2026 were under the share repurchase program approved on September 16, 2024. Shares repurchased during the first quarter of fiscal year 2025 were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $1.7 billion and $1.3 billion for the three months ended September 30, 2025 and 2024, respectively.
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date | Payment Date | Dividend Per Share | Amount | ||||||||||||
| Fiscal Year 2026 | (In millions) | |||||||||||||||
| September 15, 2025 | November 20, 2025 | December 11, 2025 | $ | 0.91 | $ | 6,765 | ||||||||||
| Fiscal Year 2025 | ||||||||||||||||
| September 16, 2024 | November 21, 2024 | December 12, 2024 | $ | 0.83 | $ | 6,170 | ||||||||||
The dividend declared on September 15, 2025 was included in other current liabilities as of September 30, 2025.
PART I
Item 1
NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Derivatives | ||||||||
| Balance, beginning of period | $ | **(**8 | ) | $ | (3 | ) | ||
| Unrealized gains (losses), net of tax of $(2) and $7 | **(**7 | ) | 29 | |||||
| Reclassification adjustments for (gains) losses included in other income (expense), net | 5 | (49 | ) | |||||
| Tax expense (benefit) included in provision for income taxes | **(**1 | ) | 10 | |||||
| Amounts reclassified from accumulated other comprehensive loss | 4 | (39 | ) | |||||
| Net change related to derivatives, net of tax of $(1) and $(3) | **(**3 | ) | (10 | ) | ||||
| Balance, end of period | $ | **(**11 | ) | $ | (13 | ) | ||
| Investments | ||||||||
| Balance, beginning of period | $ | **(**1,051 | ) | $ | (2,625 | ) | ||
| Unrealized gains, net of tax of **$**185 and $297 | 695 | 1,118 | ||||||
| Reclassification adjustments for gains included in other income (expense), net | **(**10 | ) | (5 | ) | ||||
| Tax expense included in provision for income taxes | 2 | 1 | ||||||
| Amounts reclassified from accumulated other comprehensive loss | **(**8 | ) | (4 | ) | ||||
| Net change related to investments, net of tax of **$**183 and $296 | 687 | 1,114 | ||||||
| Balance, end of period | $ | **(**364 | ) | $ | (1,511 | ) | ||
| Translation Adjustments and Other | ||||||||
| Balance, beginning of period | $ | **(**2,288 | ) | $ | (2,962 | ) | ||
| Translation adjustments and other, net of tax of **$**0 and $0 | **(**98 | ) | 304 | |||||
| Balance, end of period | $ | **(**2,386 | ) | $ | (2,658 | ) | ||
| Accumulated other comprehensive loss, end of period | $ | **(**2,761 | ) | $ | (4,182 | ) | ||
NOTE 16 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker (“CODM”), who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements. The primary profitability measure used by the CODM to review segment operating results is operating income. The CODM uses operating income to allocate resources during our annual planning process and throughout the year, as well as to assess the performance of our segments, primarily by monitoring actual results compared to prior periods and expected results. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Our reportable segments are described below.
Productivity and Business Processes
Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
Microsoft 365 Commercial products and cloud services, including Microsoft 365 Commercial cloud, 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; and Microsoft 365 Commercial products, comprising Windows Commercial on-premises and Office licensed on-premises.
PART I
Item 1
Microsoft 365 Consumer products and cloud services, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other consumer services.
LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.
Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Power Apps, and Power Automate; and on-premises ERP and CRM applications.
Intelligent Cloud
Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that power modern business and developers. This segment primarily comprises:
Server products and cloud services, including Azure and other cloud services, comprising cloud and AI consumption-based services, GitHub cloud services, Nuance Healthcare cloud services, virtual desktop offerings, and other cloud services; and Server products, comprising SQL Server, Windows Server, Visual Studio, System Center, related Client Access Licenses, and other on-premises offerings.
Enterprise and partner services, including Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and Learning Experience.
More Personal Computing
Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:
Windows and Devices, including Windows OEM licensing (Windows Pro and non-Pro licenses sold through the OEM channel) and Devices, comprising Surface and PC accessories.
Gaming, including Xbox hardware and 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 and news advertising, comprising Bing and Copilot, Microsoft News, Microsoft Edge, and third-party affiliates.
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.
In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.
PART I
Item 1
Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Productivity and Business Processes | ||||||||
| Revenue | $ | 33,020 | $ | 28,317 | ||||
| Cost of revenue | 5,721 | 5,294 | ||||||
| Operating expenses | 6,892 | 6,507 | ||||||
| Operating income | $ | 20,407 | $ | 16,516 | ||||
| Intelligent Cloud | ||||||||
| Revenue | $ | 30,897 | $ | 24,092 | ||||
| Cost of revenue | 12,314 | 8,614 | ||||||
| Operating expenses | 5,192 | 4,975 | ||||||
| Operating income | $ | 13,391 | $ | 10,503 | ||||
| More Personal Computing | ||||||||
| Revenue | $ | 13,756 | $ | 13,176 | ||||
| Cost of revenue | 6,008 | 6,191 | ||||||
| Operating expenses | 3,585 | 3,452 | ||||||
| Operating income | $ | 4,163 | $ | 3,533 | ||||
| Total | ||||||||
| Revenue | $ | 77,673 | $ | 65,585 | ||||
| Cost of revenue | 24,043 | 20,099 | ||||||
| Operating expenses | 15,669 | 14,934 | ||||||
| Operating income | $ | 37,961 | $ | 30,552 | ||||
No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three months ended September 30, 2025 or 2024. Revenue, classified by the major geographic areas in which our customers were located, was as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| United States (a) | $ | 40,077 | $ | 33,913 | ||||
| Other countries | 37,596 | 31,672 | ||||||
| Total | $ | 77,673 | $ | 65,585 | ||||
(a)
Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.
PART I
Item 1
Revenue, classified by significant product and service offerings, was as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Server products and cloud services | $ | 28,872 | $ | 22,155 | ||||
| Microsoft 365 Commercial products and cloud services | 23,966 | 20,449 | ||||||
| Gaming | 5,508 | 5,621 | ||||||
| 4,714 | 4,292 | |||||||
| Windows and Devices | 4,551 | 4,329 | ||||||
| Search and news advertising | 3,697 | 3,225 | ||||||
| Microsoft 365 Consumer products and cloud services | 2,204 | 1,727 | ||||||
| Dynamics products and cloud services | 2,136 | 1,849 | ||||||
| Enterprise and partner services | 2,022 | 1,928 | ||||||
| Other | 3 | 10 | ||||||
| Total | $ | 77,673 | $ | 65,585 | ||||
Our Microsoft Cloud revenue, which includes Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365, was $49.1 billion and $38.9 billion for the three months ended September 30, 2025 and 2024, respectively. These amounts are included in Server products and cloud services, Microsoft 365 Commercial products and cloud services, LinkedIn, and Dynamics products and cloud services in the table above.
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
NOTE 17 — SUBSEQUENT EVENT
On October 28, 2025, we signed a new definitive agreement with OpenAI that extends our partnership and continues to build on our shared vision to advance artificial intelligence responsibly and make its benefits broadly accessible. Additionally, OpenAI has formed a public benefit corporation (“PBC”) and completed a recapitalization. As a result of the recapitalization, Microsoft holds approximately 27 percent in the PBC on an as-converted diluted basis. Under the new agreement, OpenAI has contracted to purchase an incremental $250 billion of Azure services, and Microsoft will no longer have a right of first refusal to be OpenAI's compute provider.
We will continue to account for our $13 billion of total funding commitments to OpenAI as an investment under the equity method of accounting. Under the equity method of accounting, the impact of changes in our proportionate ownership will be recognized as a gain or loss in other income (expense), net. See Note 1 – Accounting Policies, Note 3 – Other Income (Expense), Net, and Note 4 – Investments for further details on our equity method investments and other income (expense), net.
PART I
Item 1
REPORT OF INDEPENDENT REGIST****ERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Microsoft Corporation
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the "Company") as of September 30, 2025, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month periods ended September 30, 2025 and 2024, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of June 30, 2025, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated July 30, 2025, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2025, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/S/ DELOITTE & TOUCHE LLP
Seattle, Washington
October 29, 2025
PART I
Item 2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note About Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” (Part II, Item 1A of this Form 10-Q). These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” (Part I, Item 3 of this Form 10-Q), and “Risk Factors”. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
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 Annual Report on Form 10-K for the year ended June 30, 2025, and our consolidated financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
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 tools, 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 the first quarter of fiscal year 2026 compared with the first quarter of fiscal year 2025 included:
Microsoft Cloud revenue increased 26% to $49.1 billion.
Commercial remaining performance obligation increased 51% to $392 billion.
Microsoft 365 Commercial cloud revenue increased 17%.
Microsoft 365 Consumer cloud revenue increased 26%.
LinkedIn revenue increased 10%.
Dynamics 365 revenue increased 18%.
Azure and other cloud services revenue increased 40%.
Windows OEM and Devices revenue increased 6%.
Xbox content and services revenue increased 1%.
Search and news advertising revenue excluding traffic acquisition costs increased 16%.
PART I
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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.
Microsoft and OpenAI Global, LLC (“OpenAI”) maintain a long-term strategic partnership originally established in 2019. Microsoft is a major investor in OpenAI, and the companies have reciprocal revenue-sharing arrangements. We hold rights to OpenAI’s intellectual property, including models and infrastructure, for integration into our products.
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 disruptions at these suppliers could impact our ability to 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 did not have a material impact on reported revenue and expenses from our international operations in the first quarter of 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 II, Item 1A of this Form 10-Q) 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 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.
PART I
Item 2
Additional information on our reportable segments is contained in Note 16 – Segment Information and Geographic Data of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).
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 I, Item 1 of this Form 10-Q). 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, Nuance Healthcare cloud services, virtual desktop offerings, and other cloud services |
PART I
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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 and news advertising revenue (ex TAC) growth | Revenue from search and news advertising excluding traffic acquisition costs (“TAC”) paid to Bing Ads network publishers and news partners |
SUMMARY RESULTS OF OPERATIONS
| (In millions, except percentages and per share amounts) | Three Months Ended September 30, | Percentage Change | ||||||||||
| 2025 | 2024 | |||||||||||
| Revenue | $ | 77,673 | $ | 65,585 | 18% | |||||||
| Gross margin | 53,630 | 45,486 | 18% | |||||||||
| Operating income | 37,961 | 30,552 | 24% | |||||||||
| Net income | 27,747 | 24,667 | 12% | |||||||||
| Diluted earnings per share | 3.72 | 3.30 | 13% | |||||||||
| Adjusted net income (non-GAAP) | 30,833 | 25,190 | 22% | |||||||||
| Adjusted diluted earnings per share (non-GAAP) | 4.13 | 3.37 | 23% | |||||||||
Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net 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.
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
Revenue increased $12.1 billion or 18% with growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud. More Personal Computing revenue increased driven by Windows OEM and Search and news advertising, offset in part by declines in our hardware businesses, including Devices and Xbox hardware.
Cost of revenue increased $3.9 billion or 20% driven by growth in Microsoft Cloud.
Gross margin increased $8.1 billion or 18% with growth across each of our segments.
Gross margin percentage decreased slightly driven by scaling our AI infrastructure and growing usage of AI product features, offset in part by efficiency gains across the Microsoft Cloud.
Microsoft Cloud gross margin percentage decreased to 68% driven by scaling our AI infrastructure and growing usage of AI product features, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud.
Operating expenses increased $735 million or 5% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development across the portfolio.
Operating income increased $7.4 billion or 24% with growth across each of our segments.
Gross margin and operating income both included a favorable foreign currency impact of 2%.
PART I
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Current 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 $3.1 billion and $0.41, 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 $523 million and $0.07, respectively.
SEGMENT RESULTS OF OPERATIONS
| (In millions, except percentages) | Three Months Ended September 30, | Percentage Change | ||||||||||
| 2025 | 2024 | |||||||||||
| Productivity and Business Processes | ||||||||||||
| Revenue | $ | 33,020 | $ | 28,317 | 17% | |||||||
| Cost of revenue | 5,721 | 5,294 | 8% | |||||||||
| Operating expenses | 6,892 | 6,507 | 6% | |||||||||
| Operating income | $ | 20,407 | $ | 16,516 | 24% | |||||||
| Intelligent Cloud | ||||||||||||
| Revenue | $ | 30,897 | $ | 24,092 | 28% | |||||||
| Cost of revenue | 12,314 | 8,614 | 43% | |||||||||
| Operating expenses | 5,192 | 4,975 | 4% | |||||||||
| Operating income | $ | 13,391 | $ | 10,503 | 27% | |||||||
| More Personal Computing | ||||||||||||
| Revenue | $ | 13,756 | $ | 13,176 | 4% | |||||||
| Cost of revenue | 6,008 | 6,191 | (3)% | |||||||||
| Operating expenses | 3,585 | 3,452 | 4% | |||||||||
| Operating income | $ | 4,163 | $ | 3,533 | 18% | |||||||
| Total | ||||||||||||
| Revenue | $ | 77,673 | $ | 65,585 | 18% | |||||||
| Cost of revenue | 24,043 | 20,099 | 20% | |||||||||
| Operating expenses | 15,669 | 14,934 | 5% | |||||||||
| Operating income | $ | 37,961 | $ | 30,552 | 24% | |||||||
Reportable Segments
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
Productivity and Business Processes
Revenue increased $4.7 billion or 17%.
Microsoft 365 Commercial products and cloud services revenue increased $3.5 billion or 17%. Microsoft 365 Commercial cloud revenue grew 17% with growth in revenue per user driven by Microsoft 365 E5 and Microsoft 365 Copilot, as well as benefit from in-period revenue recognition. Microsoft 365 Commercial seats grew 6% driven by small and medium businesses and frontline worker offerings. Microsoft 365 Commercial products revenue grew 17% driven by an increase in Office 2024 transactional purchasing as well as growth in the Windows Commercial on-premises components of Microsoft 365 suite sales.
Microsoft 365 Consumer products and cloud services revenue increased $477 million or 28%. Microsoft 365 Consumer cloud revenue grew 26% driven by growth in revenue per user and Microsoft 365 Consumer subscriber growth of 7%.
LinkedIn revenue increased $422 million or 10% driven by growth in Marketing Solutions.
Dynamics products and cloud services revenue increased $287 million or 16% driven by growth in Dynamics 365. Dynamics 365 revenue grew 18% with growth across all workloads.
Operating income increased $3.9 billion or 24%.
Cost of revenue increased $427 million or 8% driven by growth in Microsoft 365 Commercial cloud.
PART I
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Gross margin increased $4.3 billion or 19% driven by growth in Microsoft 365 Commercial cloud. Gross margin percentage increased driven by efficiency gains in Microsoft 365 Commercial cloud even with the impact of scaling our AI infrastructure and growing usage of AI product features.
Operating expenses increased $385 million or 6% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development that benefits the entire portfolio.
Revenue, gross margin, and operating income included a favorable foreign currency impact of 3%, 3%, and 4%, respectively.
Intelligent Cloud
Revenue increased $6.8 billion or 28%.
Server products and cloud services revenue increased $6.7 billion or 30% driven by Azure and other cloud services. Azure and other cloud services revenue grew 40% driven by demand for our portfolio of services with continued growth across all workloads. Server products revenue increased 1% driven by an increase in transactional purchasing of Windows Server 2025.
Enterprise and partner services revenue increased $94 million or 5% driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions.
Operating income increased $2.9 billion or 27%.
Cost of revenue increased $3.7 billion or 43% driven by growth in Azure.
Gross margin increased $3.1 billion or 20% driven by growth in Azure. Gross margin percentage decreased driven by the impact of scaling our AI infrastructure, offset in part by efficiency gains in Azure.
Operating expenses increased $217 million or 4% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development that benefits the entire portfolio.
More Personal Computing
Revenue increased $580 million or 4%.
Windows and Devices revenue increased $222 million or 5%. Windows OEM and Devices revenue increased 6% driven by Windows OEM growth of 18% with demand ahead of Windows 10 end of support and inventory levels that remained elevated, offset in part by a decline in Devices.
Gaming revenue decreased $113 million or 2% driven by a decline in Xbox hardware, offset in part by growth in Xbox content and services. Xbox hardware revenue decreased 29% driven by lower volume of consoles sold. Xbox content and services revenue increased 1% on a strong prior year comparable with growth in Xbox Game Pass and third-party content, offset in part by a decline in first-party content.
Search and news advertising revenue increased $472 million or 15%. Search and news advertising revenue excluding traffic acquisition costs increased 16% driven by higher search volume and continued benefit from third-party partnerships.
Operating income increased $630 million or 18%.
Cost of revenue decreased $183 million or 3% driven by lower hardware sales, offset in part by growth in Search and news advertising.
Gross margin increased $763 million or 11% driven by growth in Windows OEM and Search and news advertising. Gross margin percentage increased driven by sales mix shift to higher margin businesses.
Operating expenses increased $133 million or 4% driven by investments in AI talent and compute capacity to support product development that benefits the entire portfolio.
Operating income included a favorable foreign currency impact of 2%.
PART I
Item 2
OPERATING EXPENSES
Research and Development
| (In millions, except percentages) | Three Months Ended September 30, | Percentage Change | ||||||||||
| 2025 | 2024 | |||||||||||
| Research and development | $ | 8,146 | $ | 7,544 | 8% | |||||||
| As a percent of revenue | 10% | 12% | (2)ppt | |||||||||
Research and development expenses include payroll, employee benefits, stock-based compensation expense, 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 amortization of purchased software code and services content.
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
Research and development expenses increased $602 million or 8% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development across the portfolio.
Sales and Marketing
| (In millions, except percentages) | Three Months Ended September 30, | Percentage Change | ||||||||||
| 2025 | 2024 | |||||||||||
| Sales and marketing | $ | 5,717 | $ | 5,717 | 0% | |||||||
| As a percent of revenue | 7% | 9% | (2)ppt | |||||||||
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
Sales and marketing expenses were relatively unchanged.
General and Administrative
| (In millions, except percentages) | Three Months Ended September 30, | Percentage Change | ||||||||||
| 2025 | 2024 | |||||||||||
| General and administrative | $ | 1,806 | $ | 1,673 | 8% | |||||||
| As a percent of revenue | 2% | 3% | (1)ppt | |||||||||
General and administrative expenses include payroll, employee benefits, stock-based compensation expense, employee severance expense incurred as part of a corporate program, 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.
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
General and administrative expenses increased $133 million or 8% driven by higher legal expenses.
PART I
Item 2
OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
| (In millions) | ||||||||
| Three Months Ended September 30, | 2025 | 2024 | ||||||
| Interest and dividends income | $ | 976 | $ | 681 | ||||
| Interest expense | (698 | ) | (582 | ) | ||||
| Net recognized gains (losses) on investments | (572 | ) | 463 | |||||
| Net gains (losses) on derivatives | 1,579 | (338 | ) | |||||
| Net gains (losses) on foreign currency remeasurements | (22 | ) | 176 | |||||
| Other, net | (4,923 | ) | (683 | ) | ||||
| Total | $ | (3,660 | ) | $ | (283 | ) | ||
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.
For the three months ended September 30, 2025 and 2024, other income (expense), net included $4.1 billion and $688 million, respectively, of net losses from investments in OpenAI, primarily net recognized losses on our equity method investment.
Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024
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 losses on investments increased primarily due to losses on equity securities in the current period as compared to gains in the prior 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 losses on equity method investments, including OpenAI.
INCOME TAXES
Effective Tax Rate
Our effective tax rate was 19% for both the three months ended September 30, 2025 and 2024. Our effective tax rate for the three months ended September 30, 2025 was relatively unchanged compared to prior year as U.S. tax law changes from the One Big Beautiful Bill Act enacted on July 4, 2025 were offset by 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 for the three months ended September 30, 2025, 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.
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 September 30, 2025, 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 do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months.
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 2020 and thereafter.
PART I
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