Why do GAAP and non-GAAP earnings differ so much this quarter?

Microsoft recorded a $3.1 billion net income impact (about $0.41 per diluted share) from losses on its investments in OpenAI. GAAP net income was $27.7 billion, while non-GAAP net income excluding this item was $30.8 billion. Microsoft presents the non-GAAP figure to show operating trends, but investors should consider both, as the OpenAI mark-to-market effects can recur.

How strong is the growth in Microsoft's cloud business?

Very strong. Microsoft Cloud revenue rose 26% to $49.1 billion, Azure and other cloud services grew 40%, and commercial remaining performance obligation increased 51% to $392 billion. The backlog figure suggests contracted future revenue well above current run rates.

What does the revised OpenAI agreement mean for Microsoft?

Microsoft's stake in OpenAI Group PBC is valued at roughly $135 billion, about 27% on an as-converted diluted basis. Microsoft keeps exclusive IP rights (extended through 2032, now including post-AGI models with safety guardrails) and Azure API exclusivity until AGI. In exchange, it loses its right of first refusal to be OpenAI's compute provider, while OpenAI commits to an incremental $250 billion of Azure services. Revenue share payments continue but over a longer period.

Is Microsoft's heavy AI infrastructure spending affecting cash flow?

Capital spending is rising quickly. Additions to property and equipment reached $19.4 billion in the quarter, up from $14.9 billion. Operating cash flow of $45.1 billion still covered this spending and $10.7 billion in shareholder returns, but the gap between capex and operating cash flow is a key metric to monitor as AI buildout continues.

What did Microsoft's cash and balance sheet look like at quarter end?

Cash, cash equivalents, and short-term investments totaled $102.0 billion, up from $94.6 billion at June 30, 2025. Total debt (current and long-term) was about $43.2 billion, versus $43.2 billion previously, with current debt rising to $7.8 billion. Total stockholders' equity increased to $363.1 billion.

MSFT 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed October 29, 2025. Cited figures are marked; the original filing is the authoritative source.

Microsoft reported first quarter fiscal 2026 results (quarter ended September 30, 2025) that beat on the headline lines, with revenue of $77.7 billion^a (up 18%, or 17% in constant currency), operating income of $38.0 billion (up 24%), and GAAP diluted EPS of $3.72 (up 13%).

Growth was driven by the cloud franchise: Microsoft Cloud revenue reached $49.1 billion^b (up 26%), Azure and other cloud services grew 40%, and commercial remaining performance obligation rose 51% to $392 billion. Management, led by CFO Amy Hood, characterized the quarter as exceeding expectations across revenue, operating income, and EPS. Capital intensity remains a key watch item: additions to property and equipment were $19.4 billion in the quarter, up from $14.9 billion a year earlier, and free cash flow is under pressure from this buildout.

GAAP net income was depressed by a $3.1 billion^c (about $0.41 per share) loss from investments in OpenAI, which Microsoft excludes from its non-GAAP results. On a non-GAAP basis, net income was $30.8 billion (up 22%) and diluted EPS was $4.13 (up 23%). Other expense, net, was $3.7 billion versus $0.3 billion a year earlier, reflecting this OpenAI-related charge.

Investors should weigh the non-GAAP figures against the GAAP results, since the OpenAI losses are a recurring feature of the reporting period. The filing also furnished a blog post dated October 28, 2025 describing a new definitive agreement with OpenAI. Microsoft's stake in OpenAI Group PBC is valued at approximately $135 billion^d (about 27% on an as-converted diluted basis).

Key terms include a $250 billion incremental Azure purchase commitment by OpenAI, the loss of Microsoft's right of first refusal as OpenAI's compute provider, IP rights extended through 2032, and an independent expert panel to verify any AGI declaration. Shareholder returns were $10.7 billion in the quarter through dividends and buybacks.

02—Key points

Key Highlights

Revenue of $77.7 billion grew 18% year over year (17% in constant currency), with operating income of $38.0 billion up 24%.
Azure and other cloud services revenue grew 40% (39% in constant currency), and Microsoft Cloud revenue reached $49.1 billion, up 26%.
Commercial remaining performance obligation rose 51% to $392 billion, signaling strong forward demand.
GAAP diluted EPS was $3.72 (up 13%); non-GAAP diluted EPS excluding a $0.41 OpenAI investment loss was $4.13 (up 23%).
Capital expenditures (additions to property and equipment) were $19.4 billion versus $14.9 billion a year earlier, a 30% increase that pressures free cash flow.
Cash from operations was $45.1 billion, while $10.7 billion was returned to shareholders via dividends ($6.2 billion) and buybacks ($5.7 billion).
The OpenAI agreement values Microsoft's stake at about $135 billion (roughly 27% as-converted) and adds a $250 billion incremental Azure commitment from OpenAI, while removing Microsoft's right of first refusal on compute.

03—Questions

Frequently Asked Questions

Why do GAAP and non-GAAP earnings differ so much this quarter?
Microsoft recorded a $3.1 billion net income impact (about $0.41 per diluted share) from losses on its investments in OpenAI. GAAP net income was $27.7 billion, while non-GAAP net income excluding this item was $30.8 billion. Microsoft presents the non-GAAP figure to show operating trends, but investors should consider both, as the OpenAI mark-to-market effects can recur.
How strong is the growth in Microsoft's cloud business?
Very strong. Microsoft Cloud revenue rose 26% to $49.1 billion, Azure and other cloud services grew 40%, and commercial remaining performance obligation increased 51% to $392 billion. The backlog figure suggests contracted future revenue well above current run rates.
What does the revised OpenAI agreement mean for Microsoft?
Microsoft's stake in OpenAI Group PBC is valued at roughly $135 billion, about 27% on an as-converted diluted basis. Microsoft keeps exclusive IP rights (extended through 2032, now including post-AGI models with safety guardrails) and Azure API exclusivity until AGI. In exchange, it loses its right of first refusal to be OpenAI's compute provider, while OpenAI commits to an incremental $250 billion of Azure services. Revenue share payments continue but over a longer period.
Is Microsoft's heavy AI infrastructure spending affecting cash flow?
Capital spending is rising quickly. Additions to property and equipment reached $19.4 billion in the quarter, up from $14.9 billion. Operating cash flow of $45.1 billion still covered this spending and $10.7 billion in shareholder returns, but the gap between capex and operating cash flow is a key metric to monitor as AI buildout continues.
What did Microsoft's cash and balance sheet look like at quarter end?
Cash, cash equivalents, and short-term investments totaled $102.0 billion, up from $94.6 billion at June 30, 2025. Total debt (current and long-term) was about $43.2 billion, versus $43.2 billion previously, with current debt rising to $7.8 billion. Total stockholders' equity increased to $363.1 billion.

04—Continue

← View all 8-K filings