Item 2. Management's Discussion and Analysis

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

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 $4.5 billion and $0.60, 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 $2.0 billion and $0.28, respectively.

SEGMENT RESULTS OF OPERATIONS

(In millions, except percentages)		Three Months Ended March 31,								Percentage Change				Nine Months Ended March 31,								Percentage Change
		2026				2025								2026				2025
Productivity and Business Processes
Revenue		$	35,013			$	29,944				17%			$	102,149			$	87,698				16%
Cost of revenue			6,197				5,517				12%				18,028				16,380				10%
Operating expenses			7,843				7,048				11%				22,142				20,538				8%
Operating income		$	20,973			$	17,379				21%			$	61,979			$	50,780				22%
Intelligent Cloud
Revenue		$	34,681			$	26,751				30%			$	98,485			$	76,387				29%
Cost of revenue			15,120				10,307				47%				41,000				28,326				45%
Operating expenses			5,808				5,349				9%				16,468				15,612				5%
Operating income		$	13,753			$	11,095				24%			$	41,017			$	32,449				26%
More Personal Computing
Revenue		$	13,192			$	13,371				(1)%			$	41,198			$	41,198				0%
Cost of revenue			5,511				6,095				(10)%				17,821				19,111				(7)%
Operating expenses			4,009				3,750				7%				11,739				11,111				6%
Operating income		$	3,672			$	3,526				4%			$	11,638			$	10,976				6%
Total
Revenue		$	82,886			$	70,066				18%			$	241,832			$	205,283				18%
Cost of revenue			26,828				21,919				22%				76,849				63,817				20%
Operating expenses			17,660				16,147				9%				50,349				47,261				7%
Operating income		$	38,398			$	32,000				20%			$	114,634			$	94,205				22%

Reportable Segments

Three Months Ended March 31, 2026 Compared with Three Months Ended March 31, 2025

Productivity and Business Processes

Revenue increased $5.1 billion or 17%.

Microsoft 365 Commercial products and cloud services revenue increased $3.7 billion or 17%. Microsoft 365 Commercial cloud revenue grew 19% with growth in revenue per user driven by Microsoft 365 E5 and Microsoft 365 Copilot. Microsoft 365 Commercial seats grew 6% driven by small and medium businesses and frontline worker offerings. Microsoft 365 Commercial products revenue grew 1%.

Microsoft 365 Consumer products and cloud services revenue increased $476 million or 26%. Microsoft 365 Consumer cloud revenue grew 33% driven by growth in revenue per user and Microsoft 365 Consumer subscriber growth of 7%.

LinkedIn revenue increased $521 million or 12% with growth across all lines of business.

Dynamics products and cloud services revenue increased $363 million or 19% driven by growth in Dynamics 365. Dynamics 365 revenue grew 22% with growth across all workloads.

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Operating income increased $3.6 billion or 21%.

Cost of revenue increased $680 million or 12% driven by investments in AI infrastructure to support Microsoft 365 Copilot seat and usage growth.

Gross margin increased $4.4 billion or 18% driven by growth in Microsoft 365 Commercial cloud. Gross margin percentage increased slightly driven by efficiency gains in Microsoft 365 Commercial cloud even with continued investments in AI infrastructure and growing AI product usage.

Operating expenses increased $795 million or 11% 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 higher Copilot advertising expenses.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 4%, 5%, and 7%, respectively. Operating expenses included an unfavorable foreign currency impact of 2%.

Intelligent Cloud

Revenue increased $7.9 billion or 30%.

Server products and cloud services revenue increased $7.8 billion or 32% driven by Azure and other cloud services. Azure and other cloud services revenue grew 40% driven by demand for services across the platform with continued growth across all workloads. Server products revenue increased slightly, primarily driven by higher purchases of licenses running in multi-cloud environments, offset in part by renewals with lower in-period revenue recognition from the mix of contracts and continued customer shift to cloud.

Enterprise and partner services revenue increased $141 million or 7% driven by growth in Enterprise Support Services.

Operating income increased $2.7 billion or 24%.

Cost of revenue increased $4.8 billion or 47% driven by investments in AI infrastructure to support growing customer demand and increased GitHub Copilot usage.

Gross margin increased $3.1 billion or 19% driven by growth in Azure. Gross margin percentage decreased driven by the continued investments in AI infrastructure, offset in part by efficiency gains in Azure.

Operating expenses increased $459 million or 9% primarily driven by continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio.

Revenue included a favorable foreign currency impact of 2%. Cost of revenue and operating expenses included an unfavorable foreign currency impact of 3% and 2%, respectively.

More Personal Computing

Revenue decreased $179 million or 1%.

Windows and Devices revenue decreased $103 million or 2%. Windows OEM and Devices revenue decreased 2% driven by a decline in Devices, offset in part by growth in Windows OEM as OEM partners continue to build inventory due to increasing memory pricing.

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Gaming revenue decreased $380 million 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. Xbox hardware revenue decreased 33% driven by lower volume of consoles sold.

Search advertising revenue increased $304 million or 9%. Search advertising revenue excluding traffic acquisition costs increased 12% driven by higher search volume and revenue per search, as well as continued benefit from third-party partnerships.

Operating income increased $146 million or 4%.

Cost of revenue decreased $584 million or 10% primarily driven by lower hardware sales.

Gross margin increased $405 million or 6% driven by growth in Search advertising and Gaming. Gross margin percentage increased driven by sales mix shift to higher margin businesses.

Operating expenses increased $259 million or 7% driven by impairment and other related expenses in our Gaming business and continued investments in research and development compute capacity, AI talent, and data to support product development that benefits the entire portfolio.

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

Nine Months Ended March 31, 2026 Compared with Nine Months Ended March 31, 2025

Productivity and Business Processes

Revenue increased $14.5 billion or 16%.

Microsoft 365 Commercial products and cloud services revenue increased $10.6 billion or 17%. Microsoft 365 Commercial cloud revenue grew 18% with growth in revenue per user driven by Microsoft 365 E5 and Microsoft 365 Copilot, and continued Microsoft 365 Commercial seat growth. Microsoft 365 Commercial products revenue grew 10% 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 $1.4 billion or 27%. Microsoft 365 Consumer cloud revenue grew 29% driven by growth in revenue per user and continued growth in Microsoft 365 Consumer subscribers.

LinkedIn revenue increased $1.4 billion or 11% with growth across all lines of business.

Dynamics products and cloud services revenue increased $941 million or 17% driven by growth in Dynamics 365. Dynamics 365 revenue grew 20% with growth across all workloads.

Operating income increased $11.2 billion or 22%.

Cost of revenue increased $1.6 billion or 10% driven by investments in AI infrastructure to support Microsoft 365 Copilot seat and usage growth.

Gross margin increased $12.8 billion or 18% driven by growth in Microsoft 365 Commercial cloud. Gross margin percentage increased driven by efficiency gains in Microsoft 365 Commercial cloud even with continued investments in AI infrastructure and growing AI product usage.

Operating expenses increased $1.6 billion or 8% 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 higher Copilot advertising expenses.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 3%, and 4%, respectively.

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Intelligent Cloud

Revenue increased $22.1 billion or 29%.

Server products and cloud services revenue increased $21.8 billion or 31% driven by Azure and other cloud services. Azure and other cloud services revenue grew 40% 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.

Enterprise and partner services revenue increased $381 million or 7% driven by growth in Enterprise Support Services.

Operating income increased $8.6 billion or 26%.

Cost of revenue increased $12.7 billion or 45% driven by investments in AI infrastructure to support growing customer demand.

Gross margin increased $9.4 billion or 20% driven by growth in Azure. Gross margin percentage decreased driven by the continued investments in AI infrastructure, offset in part by efficiency gains in Azure.

Operating expenses increased $856 million or 5% 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 was relatively unchanged.

Windows and Devices revenue increased slightly. Windows OEM and Devices revenue increased 2% driven by Windows OEM growth of 8% with inventory levels that remained elevated, offset in part by a decline in Devices.

Gaming revenue decreased $1.1 billion or 6% driven by declines in Xbox hardware and Xbox content and services. Xbox hardware revenue decreased 31% driven by lower volume of consoles sold. Xbox content and services revenue decreased 3% on a prior year comparable that benefited from strong first-party content performance, offset in part by growth in Xbox Game Pass.

Search advertising revenue increased $1.0 billion or 10%. Search advertising revenue excluding traffic acquisition costs increased 13% driven by higher search volume and revenue per search, as well as continued benefit from third-party partnerships.

Operating income increased $662 million or 6%.

Cost of revenue decreased $1.3 billion or 7% driven by lower hardware sales, offset in part by growth in Search advertising.

Gross margin increased $1.3 billion or 6% 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 $628 million or 6% driven by impairment and other related expenses in our Gaming 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%.

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OPERATING EXPENSES

Research and Development

(In millions, except percentages)		Three Months Ended March 31,								Percentage Change				Nine Months Ended March 31,								Percentage Change
		2026				2025								2026				2025
Research and development		$	8,915			$	8,198				9%			$	25,565			$	23,659				8%
As a percent of revenue			11%				12%				(1)ppt				11%				12%				(1)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 March 31, 2026 Compared with Three Months Ended March 31, 2025

Research and development expenses increased $717 million or 9% driven by continued investments in compute capacity, AI talent, and data to support product development across the portfolio, with headcount declining year-over-year.

Nine Months Ended March 31, 2026 Compared with Nine Months Ended March 31, 2025

Research and development expenses increased $1.9 billion or 8% driven by continued investments in compute capacity, AI talent, and data to support product development across the portfolio, as well as impairment and other related expenses in our Gaming business, with headcount declining year-over-year.

Sales and Marketing

(In millions, except percentages)		Three Months Ended March 31,								Percentage Change				Nine Months Ended March 31,								Percentage Change
		2026				2025								2026				2025
Sales and marketing		$	6,814			$	6,212				10%			$	19,115			$	18,369				4%
As a percent of revenue			8%				9%				(1)ppt				8%				9%				(1)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 March 31, 2026 Compared with Three Months Ended March 31, 2025

Sales and marketing expenses increased $602 million or 10% primarily driven by higher Copilot advertising expenses, with headcount declining year-over-year. Sales and marketing included an unfavorable foreign currency impact of 3%.

Nine Months Ended March 31, 2026 Compared with Nine Months Ended March 31, 2025

Sales and marketing expenses increased $746 million or 4% driven by higher Copilot advertising expenses, with headcount declining year-over-year. Sales and marketing included an unfavorable foreign currency impact of 2%.

General and Administrative

(In millions, except percentages)		Three Months Ended March 31,								Percentage Change				Nine Months Ended March 31,								Percentage Change
		2026				2025								2026				2025
General and administrative		$	1,931			$	1,737				11%			$	5,669			$	5,233				8%
As a percent of revenue			2%				2%				0ppt				2%				3%				(1)ppt

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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 March 31, 2026 Compared with Three Months Ended March 31, 2025

General and administrative expenses increased $194 million or 11% primarily driven by higher legal expenses, with headcount declining year-over-year.

Nine Months Ended March 31, 2026 Compared with Nine Months Ended March 31, 2025

General and administrative expenses increased $436 million or 8% driven by higher legal expenses, with headcount declining year-over-year.

OTHER INCOME (EXPENSE), NET

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

(In millions)		Three Months Ended March 31,								Nine Months Ended March 31,
		2026				2025				2026				2025
Interest and dividends income		$	730			$	597			$	2,546			$	1,878
Interest expense			(778	)			(594	)			(2,212	)			(1,770	)
Net recognized gains (losses) on investments			1,652				111				1,419				(286	)
Net gains (losses) on derivatives			124				187				1,740				(267	)
Net gains (losses) on foreign currency remeasurements			(295	)			89				(367	)			112
Other, net			(491	)			(1,013	)			4,127				(2,861	)
Total		$	942			$	(623	)		$	7,253			$	(3,194	)

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 $19 million of net losses and $5.9 billion of net gains for the three and nine months ended March 31, 2026, respectively, and $768 million and $2.7 billion of net losses for the three and nine months ended March 31, 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 the nine months ended March 31, 2026 primarily relate to the dilution gain from the OpenAI Recapitalization.

Three Months Ended March 31, 2026 Compared with Three Months Ended March 31, 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 in the current period. Net gains on derivatives decreased primarily due to lower gains on equity derivatives in the current period. Other, net primarily reflects net recognized gains (losses) on equity method investments, including OpenAI.

Nine Months Ended March 31, 2026 Compared with Nine Months Ended March 31, 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 (losses) on equity method investments, including OpenAI.

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INCOME TAXES

Effective Tax Rate

Our effective tax rate was 19% and 18% for the three months ended March 31, 2026 and 2025, respectively, and 20% and 18% for the nine months ended March 31, 2026 and 2025, respectively. The increase in our effective tax rate for the three months ended March 31, 2026 compared to the prior year was primarily due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries. The increase in our effective tax rate for the nine months ended March 31, 2026 compared to the prior year was primarily due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries and deferred tax expense attributable to the dilution gain from the OpenAI Recapitalization.

Our effective tax rate was lower than the U.S. federal statutory rate for the three and nine months ended March 31, 2026, 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 March 31, 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 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 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.

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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)		Three Months Ended March 31,								Percentage Change				Nine Months Ended March 31,								Percentage Change
		2026				2025								2026				2025
Other income (expense), net		$	942			$	(623	)			251%			$	7,253			$	(3,194	)			327%
Net (gains) losses from investments in OpenAI			19				768				(98)%				(5,898	)			2,692				(319)%
Adjusted other income (expense), net (non-GAAP)		$	961			$	145				563%			$	1,355			$	(502	)			370%
Net income		$	31,778			$	25,824				23%			$	97,983			$	74,599				31%
Net (gains) losses from investments in OpenAI, net of tax of $(5), $(185), $1,415, and $(647)			14				583				(98)%				(4,483	)			2,045				(319)%
Adjusted net income (non-GAAP)		$	31,792			$	26,407				20%			$	93,500			$	76,644				22%
Diluted earnings per share		$	4.27			$	3.46				23%			$	13.14			$	9.99				32%
Net (gains) losses from investments in OpenAI			0				0.08				(100)%				(0.60	)			0.28				(314)%
Adjusted diluted earnings per share (non-GAAP)		$	4.27			$	3.54				21%			$	12.54			$	10.27				22%

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.

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and short-term investments totaled $78.3 billion and $94.6 billion as of March 31, 2026 and June 30, 2025, respectively. Equity and other investments were $33.7 billion and $15.4 billion as of March 31, 2026 and June 30, 2025, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

Valuation

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

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A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash Flows

Cash from operations increased $34.0 billion to $127.5 billion for the nine months ended March 31, 2026, primarily due to an increase in cash received from customers and a decrease in cash used to pay income taxes, offset in part by an increase in cash paid to suppliers. Cash used in financing decreased $88 million to $40.8 billion for the nine months ended March 31, 2026, primarily due to a $6.0 billion decrease in cash used for repayments of debt, offset in part by a $3.8 billion increase in common stock repurchases and a $1.8 billion increase in dividends paid. Cash used in investing increased $42.6 billion to $84.7 billion for the nine months ended March 31, 2026, primarily due to a $32.7 billion increase in additions to property and equipment, a $9.1 billion increase in other investing primarily to facilitate the purchase of components, and a $3.8 billion decrease in cash from net investment purchases, sales, and maturities.

Debt Proceeds

We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 9 – Debt of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include cloud services and Software Assurance (“SA”). Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

The following table outlines the expected future recognition of unearned revenue as of March 31, 2026:

(In millions)
Three Months Ending
June 30, 2026		$	24,810
September 30, 2026			13,449
December 31, 2026			9,526
March 31, 2027			3,139
Thereafter			2,753
Total		$	53,677

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable. Refer to Note 11 – Unearned Revenue of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

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Material Cash Requirements and Other Obligations

Share Repurchases

For the nine months ended March 31, 2026 and 2025, we repurchased 27 million shares and 23 million shares of our common stock for $13.3 billion and $9.8 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of March 31, 2026, $44.0 billion remained of our $60 billion share repurchase program. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Dividends

For the nine months ended March 31, 2026 and 2025, our Board of Directors declared dividends totaling $20.3 billion and $18.5 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Other Planned Uses of Capital

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We will continue to invest in capital expenditures to support growth in our cloud offerings and our investments in AI infrastructure and training. We have operating and finance leases for datacenters, corporate offices, research and development facilities, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

RECENT ACCOUNTING GUIDANCE

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations. We have critical accounting estimates in the areas of revenue recognition, impairment of investment securities, goodwill, research and development costs, legal and other contingencies, and income taxes.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

Judgment is required to determine the standalone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

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In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

Remaining performance obligations represent the revenue we expect to recognize for our products and services for which control has not yet been transferred to customers. We estimate total consideration to be received at the outset of the agreement and throughout the term of the agreement. Estimating the total consideration and revenue that will be allocated to remaining performance obligation can involve significant judgments, including identifying and assessing variable consideration and potential renegotiation of commitments. We consider factors such as the nature of the terms and duration of the contract across our portfolio of contracts.

Impairment of Investment Securities

We review debt investments quarterly for credit losses and impairment. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.

Goodwill

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

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The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Research and Development Costs

Costs incurred internally in researching and developing a software product to be marketed or sold to external users are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

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