01—Abstract
Summary
Summary of the 10-Q filed January 28, 2026. Cited figures are marked; the original filing is the authoritative source.
Microsoft Corporation (MSFT) reported strong financial results for the quarter and six months ending December 31, 2025.
Revenue saw a significant increase of 17%a and 18% respectively, driven by robust performance in its Intelligent Cloud and Productivity and Business Processes segments. Net income surged by 60% for the quarter and 36% for the six-month period, largely influenced by substantial gains from its investment in OpenAI, which offset prior period losses. The company continues to invest heavily in AI infrastructure and talent, impacting gross margin percentages but driving future growth opportunities.
Key financial metrics demonstrate sustained growth, with Microsoft Cloud revenue up 26%b year-over-year. Despite increased operating expenses, primarily due to R&D investments, operating income also saw a healthy increase of 21% for the quarter.
The company maintained a strong liquidity position and continued its commitment to returning capital to shareholders through share repurchases and dividends. However, investors should remain aware of ongoing legal matters, particularly the IRS audit concerning transfer pricing, and potential impacts from intense competition and evolving regulatory landscapes.
02—Key points
Key Highlights
- Total revenue increased by 17% to $81.3 billion for the quarter and 18% to $158.9 billion for the six months ended December 31, 2025.
- Net income saw substantial growth, up 60% to $38.5 billion for the quarter and 36% to $66.2 billion for the six months, significantly boosted by gains from its OpenAI investment.
- Intelligent Cloud revenue grew by 29% year-over-year, driven by Azure and other cloud services, which saw a 39% increase.
- Productivity and Business Processes revenue increased by 16%, with Microsoft 365 Commercial cloud revenue up 17% and Microsoft 365 Consumer cloud revenue up 27%.
- The company made significant investments in R&D, particularly in compute capacity and AI talent, contributing to a 7% increase in R&D expenses for the quarter.
- Microsoft Cloud revenue increased 26% to $51.5 billion for the quarter, underscoring the strength of its cloud offerings.
- Despite strong revenue growth, gross margin percentage slightly decreased due to continued investments in AI infrastructure and growing AI product usage.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2026, Microsoft Corp kept $0.47.
- Revenue$81.27B100.0%
- Cost of revenue−$25.98B32.0%
- Gross profit$55.30B68.0%
- Operating costs−$17.02B20.9%
- Operating income$38.27B47.1%
- Interest, other & tax$183.0M0.2%
- Net income$38.46B47.3%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2026filed January 28, 2026Financial Statements
Q2 FY2026 against Q2 FY2025
| Line item | Q2 FY2026Q2 FY2025 | Change |
|---|---|---|
| Revenue | $81.27B$69.63B | +16.7% |
| Cost of Revenue | $25.98B$21.80B | +19.2% |
| Gross Profit | $55.30B$47.83B | +15.6% |
| R&D Expenses | $8.50B$7.92B | +7.4% |
| Operating Expenses | $17.02B$16.18B | +5.2% |
| Operating Income | $38.27B$31.65B | +20.9% |
| Net Income | $38.46B$24.11B | +59.5% |
| EPS (Basic) | $5.18$3.24 | +59.9% |
| EPS (Diluted) | $5.16$3.23 | +59.8% |
| Shares Outstanding (Basic) | 7.43B7.43B | −0.1% |
| Shares Outstanding (Diluted) | 7.46B7.47B | −0.1% |
05—Questions
Frequently Asked Questions
What was the primary driver for the significant increase in net income?
The substantial increase in net income was primarily driven by significant net gains from Microsoft's investment in OpenAI, particularly related to the OpenAI Recapitalization. These gains significantly boosted the reported net income for the period.
How are the company's investments in AI impacting its financial performance?
Microsoft is making substantial investments in AI infrastructure and talent, which is reflected in increased operating expenses, particularly in Research and Development. While these investments are driving future growth opportunities and are crucial for competitiveness, they have also led to a slight decrease in gross margin percentage due to infrastructure costs and growing AI product usage.
What is the company's outlook on its cloud business?
The company's cloud business continues to show strong growth. Microsoft Cloud revenue increased by 26% to $51.5 billion for the quarter. Azure and other cloud services revenue grew by 39%, and Microsoft 365 Commercial cloud revenue increased by 17%, indicating sustained demand and expansion in its cloud offerings.
Are there any significant legal or regulatory risks mentioned that investors should be aware of?
Yes, the company is subject to ongoing legal and regulatory scrutiny. Notably, it remains under IRS audit for tax years 2014-2017, with proposed adjustments related to intercompany transfer pricing seeking a substantial tax payment. Additionally, the company faces evolving legal and regulatory requirements related to AI, data privacy, competition laws, and cybersecurity worldwide, which could impact its operations and financial performance.
06—Continue