SEC EDGAR · 10-Q
10-Q – 2026-01-28 – msft-20251231.htm
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Omsättning
- Unregistered Sales of Equity Securities and Use of Proceeds
- Revenue:
- Total revenue
- Cost of revenue:
- Total cost of revenue
- Sales and marketing
- Short-term unearned revenue
- Long-term unearned revenue
Rörelseresultat
- Operating income
- 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
- Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:
- Operating expenses increased $840 million or 5% driven by research and development investments in compute capacity and AI talent, as well as impairment charges in our Gaming business. | Operating income increased $6.6 billion or 21% driven by growth in Productivity and Business Processes and Intelligent Cloud. | Revenue, gross margin, and operating income each included a favorable foreign currency impact of 2%.
- Operating income increased $6.6 billion or 21% driven by growth in Productivity and Business Processes and Intelligent Cloud. | Revenue, gross margin, and operating income each included a favorable 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 $7.6 billion and $1.02, 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 $939 million and $0.12, respectively.
- Operating expenses increased $1.6 billion or 5% driven by research and development investments in compute capacity and AI talent, as well as impairment charges in our Gaming business. | Operating income increased $14.0 billion or 23% with growth across each of our segments. | Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 2%, and 3%, respectively.
- Operating income increased $14.0 billion or 23% with growth across each of our segments. | Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 2%, and 3%, respectively.
- Operating income increased $3.7 billion or 22%. | • Cost of revenue increased $541 million or 10% driven by growth in Microsoft 365 Commercial cloud.
Periodens resultat
- Net income
- Adjustments to reconcile net income to net cash from operations:
- Net income available for common shareholders (A)
- Changes in Fair Value Recorded in Net Income
- Adjusted net income (non-GAAP)
- Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. | Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
- Revenue, gross margin, and operating income each included a favorable 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 $7.6 billion and $1.02, 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 $939 million and $0.12, respectively. | Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024
- 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 $1.5 billion and $0.20, respectively. | SEGMENT RESULTS OF OPERATIONS
Resultat per aktie
- Earnings per share:
- NOTE 2 — EARNINGS PER SHARE | Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
- The components of basic and diluted EPS were as follows:
- Earnings Per Share
- Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
- Diluted earnings per share
- Adjusted diluted earnings per share (non-GAAP)
- Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. | Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024
Kassaflöde
- For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. | For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. | For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.
- • Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to a
- We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. | Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
- 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.
- Designated as Cash Flow Hedging Instruments
- Supplemental cash flow information related to leases was as follows:
- 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 | 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 i | 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.
Likvida medel
- Cash and cash equivalents
- Effect of foreign exchange rates on cash and cash equivalents
- Net change in cash and cash equivalents
- Cash and cash equivalents, beginning of period
- Cash and cash equivalents, end of period
Nettoskuld
- Adjustments to reconcile net income to net cash from operations:
- Net cash from operations
- Net cash used in financing
- Net cash used in investing
- Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The info | We have recast certain prior period amounts on our consolidated cash flows statements to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from (used in) operations, investing, or financing on our consolidated cash flows statements.
Eget kapital
- Stockholders’ Equity Statements for the Three and Six Months Ended December 31, 2025 and 2024
- Liabilities and stockholders’ equity
- Stockholders’ equity:
- Total stockholders’ equity
- Total liabilities and stockholders’ equity
- NOTE 14 — STOCKHOLDERS’ EQUITY | Share Repurchases
- Results of Review of Interim Financial Information | We have reviewed the accompanying consolidated balance sheet of Microsoft Corporation and subsidiaries (the "Company") as of December 31, 2025, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month and six-month periods ended December 31, 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 m
- 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 i
Antal aktier
- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ | Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
- Weighted average shares outstanding:
- NOTE 2 — EARNINGS PER SHARE | Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
Antal anställda
- 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 | Highlights from the second quarter of fiscal year 2026 compared with the second quarter of fiscal year 2025 included:
- 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 s | Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. | Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies increased reported revenue and did not have a material impact on reported expenses from our international operations for the three and six months en
- We make significant investments in products and services that may not achieve expected returns. We will continue to make significant investments in research, development, and marketing for existing products, services, and technologies, including AI-based products and services. We also invest in the development and acquisition of a variety of hardware for productivity, communication, and entertainment, including PCs, tablets, and gaming devices. Investments in new technology are speculative. Comm | Acquisitions, joint ventures, and strategic alliances could have an adverse effect on our business. We expect to continue making acquisitions and entering into joint ventures and strategic alliances as part of our long-term business strategy. For example, in October 2023 we completed our acquisition of Activision Blizzard, Inc. We have a long-term strategic partnership with OpenAI, and in October 2025 we announced a significant update to this partnership. Acquisitions and other transactions and
- Threats to security can take a variety of forms. Threat actors, including individual and groups of hackers and sophisticated organizations, including nation-states, state-sponsored organizations, or cybercriminal groups, continuously undertake attacks that pose threats to our customers and our internal infrastructure, and we have experienced cybersecurity incidents in which such actors have gained unauthorized access to our systems and data, including customer systems and data. These actors use | Inadequate account security or organizational security practices, including those of companies we have acquired or those of the third parties we utilize, have resulted and may result in unauthorized access to our systems and data, including customer systems and data. For example, passwords may not be rotated and employee access may not be updated or removed on a timely basis. Employees or third parties may intentionally compromise our or our users’ security or systems or reveal confidential info
- • Anti-corruption: The Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or agents, and the accounting provisions of the FCPA require us to maintain accurate books and records and adequate internal controls. From time to time, we receive inquiries from authorities in the U.S. and elsewhere which may be based on reports from employees and others about our business activities and our c
- GENERAL RISKS | If our reputation or our brands are damaged, our business and results of operations may be harmed . Our reputation and brands are globally recognized and are important to our business. Our reputation and brands affect our ability to attract and retain consumer, business, and public-sector customers. There are numerous ways our reputation or brands could be damaged. These include product safety or quality issues, our environmental impact and sustainability, supply chain practices, or human rights | • The introduction of new features, products, services, or terms of service that customers, users, or partners do not like.
- • Data security breaches, cybersecurity incidents, responsible AI failures, compliance failures, or actions of partners or individual employees.
- Social media may increase the likelihood, speed, and magnitude of negative brand events. If our brands or reputation are damaged, it could adversely affect our business, results of operations, or ability to attract the most highly qualified employees. | Adverse economic or market conditions could harm our business. Worsening economic conditions, including inflation, recession, pandemic, or other changes in economic conditions, may cause lower IT spending and adversely affect our results of operations. If demand for computing power, PCs, servers, and other computing devices declines, or consumer or business spending for those products declines, our results of operations could be adversely affected.
Bruttomarginal
- Gross margin
- 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 al
- 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 base
- Microsoft Cloud gross margin percentage
- Gross margin percentage for our Microsoft Cloud business
- Cost of revenue increased $4.2 billion or 19% driven by growth in Microsoft Cloud. | Gross margin increased $7.5 billion or 16% with growth across each of our segments. | • Gross margin percentage decreased slightly driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud and sales mix shift to higher margin businesses.
- Gross margin increased $7.5 billion or 16% with growth across each of our segments. | • Gross margin percentage decreased slightly driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud and sales mix shift to higher margin businesses.
- • Microsoft Cloud gross margin percentage decreased to 67% driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud.
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msft:MorePersonalComputingMember 2025-12-31 iso4217:EUR xbrli:pure msft:Segment xbrli:shares iso4217:USD xbrli:shares iso4217:USD UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10- Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2025 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to Commission File Number 001-37845 MICROSOFT CORPORATION Washington 91-1144442 (STATE OF INCORPORATION) (I.R.S. ID) ONE MICROSOFT WAY , REDMOND , Washington 98052-6399 ( 425 ) 882-8080 www.microsoft.com/investor Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of exchange on which registered Common stock, $0.00000625 par value per share MSFT Nasdaq 3.125% Notes due 2028 MSFT Nasdaq 2.625% Notes due 2033 MSFT Nasdaq Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Outstanding as of January 22, 2026 Common Stock, $ 0.00000625 par value per share 7,425,629,076 shares MICROSOFT CORPORATION FORM 10-Q For the Quarter Ended December 31, 2025 INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements a) Income Statements for the Three and Six Months Ended December 31, 2025 and 2024 3 b) Comprehensive Income Statements for the Three and Six Months Ended December 31, 2025 and 2024 4 c) Balance Sheets as of December 31, 2025 and June 30, 2025 5 d) Cash Flows Statements for the Three and Six Months Ended December 31, 2025 and 2024 6 e) Stockholders’ Equity Statements for the Three and Six Months Ended December 31, 2025 and 2024 7 f) Notes to Financial Statements 8 g) Report of Independent Registered Public Accounting Firm 29 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 46 Item 4. Controls and Procedures 46 PART II. OTHER INFORMATION Item 1. Legal Proceedings 47 Item 1A. Risk Factors 47 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 62 Item 5. Other Information 63 Item 6. Exhibits 64 SIGNATURE 65 2 PART I Item 1 PART I. FINANCI AL INFORMATION ITEM 1. FINANCI AL STATEMENTS INCOME STA TEMENTS (In millions, except per share amounts) (Unaudited) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Revenue: Product $ 16,451 $ 16,219 $ 32,373 $ 31,491 Service and other 64,822 53,413 126,573 103,726 Total revenue 81,273 69,632 158,946 135,217 Cost of revenue: Product 3,505 3,856 6,427 7,150 Service and other 22,473 17,943 43,594 34,748 Total cost of revenue 25,978 21,799 50,021 41,898 Gross margin 55,295 47,833 108,925 93,319 Research and development 8,504 7,917 16,650 15,461 Sales and marketing 6,584 6,440 12,301 12,157 General and administrative 1,932 1,823 3,738 3,496 Operating income 38,275 31,653 76,236 62,205 Other income (expense), net 9,971 ( 2,288 ) 6,311 ( 2,571 ) Income before income taxes 48,246 29,365 82,547 59,634 Provision for income taxes 9,788 5,257 16,342 10,859 Net income $ 38,458 $ 24,108 $ 66,205 $ 48,775 Earnings per share: Basic $ 5.18 $ 3.24 $ 8.91 $ 6.56 Diluted $ 5.16 $ 3.23 $ 8.87 $ 6.53 Weighted average shares outstanding: Basic 7,431 7,435 7,432 7,434 Diluted 7,460 7,468 7,463 7,469 Refer to accompanying notes. 3 PART I Item 1 COMPREHENSIVE IN COME STATEMENTS (In millions) (Unaudited) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Net income $ 38,458 $ 24,108 $ 66,205 $ 48,775 Other comprehensive income (loss), net of tax: Net change related to derivatives ( 3 ) 34 ( 6 ) 24 Net change related to investments ( 161 ) ( 434 ) 526 680 Translation adjustments and other 223 ( 1,034 ) 125 ( 730 ) Other comprehensive income (loss) 59 ( 1,434 ) 645 ( 26 ) Comprehensive income $ 38,517 $ 22,674 $ 66,850 $ 48,749 Refer to accompanying notes. 4 PART I Item 1 BALANCE SHEETS (In millions) (Unaudited) December 31, 2025 June 30, 2025 Assets Current assets: Cash and cash equivalents $ 24,296 $ 30,242 Short-term investments 65,166 64,323 Total cash, cash equivalents, and short-term investments 89,462 94,565 Accounts receivable, net of allowance for doubtful accounts of $ 729 and $ 944 56,535 69,905 Inventories 1,059 938 Other current assets 33,134 25,723 Total current assets 180,190 191,131 Property and equipment, net of accumulated depreciation of $ 104,950 and $ 93,653 261,126 204,966 Operating lease right-of-use assets 25,103 24,823 Equity and other investments 21,202 15,405 Goodwill 119,622 119,509 Intangible assets, net 20,289 22,604 Other long-term assets 37,770 40,565 Total assets $ 665,302 $ 619,003 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 37,328 $ 27,724 Current portion of long-term debt 4,837 2,999 Accrued compensation 10,103 13,709 Short-term income taxes 2,050 7,211 Short-term unearned revenue 51,376 64,555 Other current liabilities 24,311 25,020 Total current liabilities 130,005 141,218 Long-term debt 35,425 40,152 Long-term income taxes 27,256 25,986 Long-term unearned revenue 2,668 2,710 Deferred income taxes 2,876 2,835 Operating lease liabilities 17,345 17,437 Other long-term liabilities 58,852 45,186 Total liabilities 274,427 275,524 Commitments and contingencies Stockholders’ equity: Common stock and paid-in capital – shares authorized 24,000 ; outstanding 7,429 and 7,434 112,788 109,095 Retained earnings 280,789 237,731 Accumulated other comprehensive loss ( 2,702 ) ( 3,347 ) Total stockholders’ equity 390,875 343,479 Total liabilities and stockholders’ equity $ 665,302 $ 619,003 Refer to accompanying notes. 5 PART I Item 1 CASH FLOWS STATEMENTS (In millions) (Unaudited) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Operations Net income $ 38,458 $ 24,108 $ 66,205 $ 48,775 Adjustments to reconcile net income to net cash from operations: Depreciation, amortization, and other 9,198 5,667 17,345 12,383 Stock-based compensation expense 3,219 3,089 6,202 5,921 Net recognized losses (gains) on investments and derivatives ( 9,931 ) 2,136 ( 6,024 ) 2,678 Deferred income taxes 4,446 ( 1,158 ) 6,937 ( 2,591 ) Changes in operating assets and liabilities: Accounts receivable ( 3,436 ) ( 5,978 ) 13,054 8,059 Inventories 70 711 ( 122 ) 338 Other current assets 619 ( 353 ) ( 543 ) ( 435 ) Other long-term assets ( 1,288 ) ( 1,089 ) ( 1,682 ) ( 2,850 ) Accounts payable 1,197 958 583 42 Unearned revenue ( 7,483 ) ( 6,338 ) ( 12,901 ) ( 11,891 ) Income taxes ( 920 ) ( 3,395 ) ( 3,864 ) ( 2,379 ) Other current liabilities 2,802 3,217 ( 2,705 ) ( 2,262 ) Other long-term liabilities ( 1,193 ) 716 ( 1,670 ) 683 Net cash from operations 35,758 22,291 80,815 56,471 Financing Repayments of debt, maturities of 90 days or less 0 0 0 ( 5,746 ) Repayments of debt ( 3,000 ) 0 ( 3,000 ) ( 966 ) Common stock issued 259 256 948 962 Common stock repurchased ( 7,415 ) ( 4,986 ) ( 13,065 ) ( 9,093 ) Common stock cash dividends paid ( 6,762 ) ( 6,170 ) ( 12,931 ) ( 11,744 ) Other, net ( 699 ) ( 343 ) ( 1,368 ) ( 1,232 ) Net cash used in financing ( 17,617 ) ( 11,243 ) ( 29,416 ) ( 27,819 ) Investing Additions to property and equipment ( 29,876 ) ( 15,804 ) ( 49,270 ) ( 30,727 ) Acquisition of companies, net of cash acquired and divestitures, and purchases of intangible and other assets ( 455 ) ( 1,405 ) ( 1,033 ) ( 3,254 ) Purchases of investments ( 9,845 ) ( 2,050 ) ( 27,516 ) ( 3,670 ) Maturities of investments 12,417 2,604 18,448 4,740 Sales of investments 5,691 2,559 8,953 4,527 Other, net ( 637 ) ( 16 ) ( 6,846 ) ( 929 ) Net cash used in investing ( 22,705 ) ( 14,112 ) ( 57,264 ) ( 29,313 ) Effect of foreign exchange rates on cash and cash equivalents 11 ( 294 ) ( 81 ) ( 172 ) Net change in cash and cash equivalents ( 4,553 ) ( 3,358 ) ( 5,946 ) ( 833 ) Cash and cash equivalents, beginning of period 28,849 20,840 30,242 18,315 Cash and cash equivalents, end of period $ 24,296 $ 17,482 $ 24,296 $ 17,482 Refer to accompanying notes. 6 PART I Item 1 STOCKHOLDERS’ EQ UITY STATEMENTS (In millions, except per share amounts) (Unaudited) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Common stock and paid-in capital Balance, beginning of period $ 110,964 $ 102,976 $ 109,095 $ 100,923 Common stock issued 259 256 948 962 Common stock repurchased ( 1,654 ) ( 1,491 ) ( 3,455 ) ( 2,976 ) Stock-based compensation expense 3,219 3,089 6,202 5,921 Other, net 0 ( 1 ) ( 2 ) ( 1 ) Balance, end of period 112,788 104,829 112,788 104,829 Retained earnings Balance, beginning of period 254,873 188,929 237,731 173,144 Net income 38,458 24,108 66,205 48,775 Common stock cash dividends ( 6,757 ) ( 6,169 ) ( 13,521 ) ( 12,340 ) Common stock repurchased ( 5,785 ) ( 3,386 ) ( 9,626 ) ( 6,097 ) Balance, end of period 280,789 203,482 280,789 203,482 Accumulated other comprehensive loss Balance, beginning of period ( 2,761 ) ( 4,182 ) ( 3,347 ) ( 5,590 ) Other comprehensive income (loss) 59 ( 1,434 ) 645 ( 26 ) Balance, end of period ( 2,702 ) ( 5,616 ) ( 2,702 ) ( 5,616 ) Total stockholders’ equity $ 390,875 $ 302,695 $ 390,875 $ 302,695 Cash dividends declared per common share $ 0.91 $ 0.83 $ 1.82 $ 1.66 Refer to accompanying notes. 7 PART I Item 1 NOTES TO FINANCI AL STATEMENTS (Unaudited) NOTE 1 — ACCOUNTING POLICIES Accounting Principles Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation fiscal year 2025 Form 10-K filed with the U.S. Securities and Exchange Commission on July 30, 2025. We have recast certain prior period amounts on our consolidated cash flows statements to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from (used in) operations, investing, or financing on our consolidated cash flows statements. Principles of Consolidation The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Estimates and Assumptions Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties. Financial Instruments Investments We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. 8 PART I Item 1 Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. 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. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. 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 with readily determinable fair values are generally measured at fair value. Equity investments that are not recorded at fair value are measured using the equity method of accounting when required or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). For equity investments recorded at fair value, we perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in fair value are recorded in other income (expense), net. Equity method investments may be recorded on a lag of up to three months when sufficient financial information is not available in a timely manner. For equity method investments recorded on a lag, we recognize the impact of intervening events that have a material impact on our consolidated financial statements in the period in which they occurred. Investments that are considered variable interest entities (“VIEs”) are evaluated to determine whether we are the primary beneficiary of the VIE, in which case we would be required to consolidate the entity. We evaluate whether we have (1) the power to direct the activities that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We have determined we are not the primary beneficiary of any of our VIE investments. Therefore, our VIE investments are not consolidated and the majority are accounted for under the equity method of accounting. We have a long-term strategic partnership with OpenAI. In October 2025, we signed a new definitive agreement with OpenAI that extends this partnership. Additionally, OpenAI formed a public benefit corporation and completed a recapitalization (“OpenAI Recapitalization”). We have an investment of approximately 27 percent of OpenAI on an as-converted basis accounted for under the equity method of accounting. As a result of the OpenAI Recapitalization, we had a decrease in our proportionate ownership of OpenAI and recorded a dilution gain in other income (expense), net. Refer to Note 3 – Other Income (Expense), Net for additional information. We calculate our equity method income or loss using the hypothetical liquidation at book value (“HLBV”) method because our liquidation rights and priorities differ from our underlying ownership interest. Under the HLBV method, we recognize income or loss based on the change in the amount we would receive if the net assets of the investee were distributed at book value. We have made total funding commitments of $ 13 billion, of which $ 11.7 billion has been funded as of December 31, 2025. Derivatives Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net. 9 PART I Item 1 Fair Value Measurements We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. • Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts. • Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. Our other current financial assets and current financial liabilities have fair values that approximate their carrying values. Contract Balances and Other Receivables As of December 31, 2025 and June 30, 2025, long-term accounts receivable, net of allowance for doubtful accounts, was $ 5.3 billion and $ 5.2 billion, respectively, and is included in other long-term assets in our consolidated balance sheets. As of December 31, 2025 and June 30, 2025, other receivables related to activities to facilitate the purchase of server components were $ 15.1 billion and $ 8.2 billion, respectively, and are included in other current assets in our consolidated balance sheets. We record financing receivables when we offer certain customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of December 31 , 2025 and June 30, 2025, our financing receivables, net were $ 2.7 billion and $ 4.3 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance for doubtful accounts which reflects our best estimate of credit losses inherent in the accounts receivable and financing receivable balances. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. 10 PART I Item 1 Recent Accounting Guidance Income Taxes – Improvements to Income Tax Disclosures In December 2023, the Financial Accounting Standards Board (“FASB”) issued a new standard to improve income tax disclosures. The guidance requires additional disclosure of disaggregated income taxes paid and prescribes standardized categories for the components of the effective tax rate reconciliation. We will adopt the standard on the effective date in our annual reporting for fiscal year 2026. The standard can be applied either prospectively or retrospectively. Income Statement – Disaggregation of Income Statement Expenses In November 2024, the FASB issued a new standard to expand disclosures about income statement expenses. The guidance requires disaggregation of certain costs and expenses included in each relevant expense caption on our consolidated income statements in a separate note to the financial statements at each interim and annual reporting period, including amounts of purchases of inventory, employee compensation, depreciation, and intangible asset amortization. The standard will be effective for us beginning with our annual reporting for fiscal year 2028 and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact of this standard on our disclosures. NOTE 2 — EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards. The components of basic and diluted EPS were as follows: (In millions, except per share amounts) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Net income available for common shareholders (A) $ 38,458 $ 24,108 $ 66,205 $ 48,775 Weighted average outstanding shares of common stock (B) 7,431 7,435 7,432 7,434 Dilutive effect of stock-based awards 29 33 31 35 Common stock and common stock equivalents (C) 7,460 7,468 7,463 7,469 Earnings Per Share Basic (A/B) $ 5.18 $ 3.24 $ 8.91 $ 6.56 Diluted (A/C) $ 5.16 $ 3.23 $ 8.87 $ 6.53 Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. 11 PART I Item 1 NOTE 3 — OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Interest and dividends income $ 840 $ 600 $ 1,816 $ 1,281 Interest expense ( 736 ) ( 594 ) ( 1,434 ) ( 1,176 ) Net recognized gains (losses) on investments 339 ( 860 ) ( 233 ) ( 397 ) Net gains (losses) on derivatives 37 ( 116 ) 1,616 ( 454 ) Net gains (losses) on foreign currency remeasurements ( 50 ) ( 153 ) ( 72 ) 23 Other, net 9,541 ( 1,165 ) 4,618 ( 1,848 ) Total $ 9,971 $ ( 2,288 ) $ 6,311 $ ( 2,571 ) Other income (expense), net included $ 10.0 billion and $ 5.9 billion of net gains for the three and six months ended December 31, 2025, respectively, and $ 1.2 billion and $ 1.9 billion of net losses for the three and six months ended December 31, 2024, 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 three and six months ended December 31, 2025 primarily relate to the dilution gain from the OpenAI Recapitalization. Net Recognized Gains (Losses) on Investments Net recognized gains (losses) on debt investments were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Realized gains from sales of available-for-sale securities $ 19 $ 9 $ 35 $ 17 Realized losses from sales of available-for-sale securities ( 9 ) ( 19 ) ( 19 ) ( 34 ) Impairments and allowance for credit losses ( 21 ) ( 14 ) ( 17 ) ( 2 ) Total $ ( 11 ) $ ( 24 ) $ ( 1 ) $ ( 19 ) Net recognized gains (losses) on equity investments were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Net realized gains (losses) on investments sold $ 3 $ ( 8 ) $ 74 $ 57 Net unrealized gains (losses) on investments still held 385 25 ( 250 ) 437 Impairments of investments ( 38 ) ( 853 ) ( 56 ) ( 872 ) Total $ 350 $ ( 836 ) $ ( 232 ) $ ( 378 ) 12 PART I Item 1 NOTE 4 — INVESTMENTS Investment Components The components of investments were as follows: (In millions) Fair Value Level Adjusted Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments December 31, 2025 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Level 2 $ 8,367 $ 0 $ 0 $ 8,367 $ 7,622 $ 745 $ 0 Certificates of deposit Level 2 3,506 0 0 3,506 3,062 444 0 U.S. government securities Level 1 48,194 147 ( 1,046 ) 47,295 2,045 45,250 0 U.S. agency securities Level 2 2,444 0 0 2,444 0 2,444 0 Foreign government bonds Level 2 402 18 ( 6 ) 414 0 414 0 Mortgage- and asset-backed securities Level 2 3,227 19 ( 21 ) 3,225 0 3,225 0 Corporate notes and bonds Level 2 12,162 176 ( 55 ) 12,283 0 12,283 0 Corporate notes and bonds Level 3 1,597 120 0 1,717 0 97 1,620 Municipal securities Level 2 170 1 ( 6 ) 165 0 165 0 Municipal securities Level 3 105 0 ( 12 ) 93 0 93 0 Total debt investments $ 80,174 $ 481 $ ( 1,146 ) $ 79,509 $ 12,729 $ 65,160 $ 1,620 Changes in Fair Value Recorded in Net Income Equity investments Level 1 $ 4,366 $ 1,346 $ 0 $ 3,020 Equity investments Other 16,562 0 0 16,562 Total equity investments $ 20,928 $ 1,346 $ 0 $ 19,582 Cash $ 10,221 $ 10,221 $ 0 $ 0 Derivatives, net (a) 6 0 6 0 Total $ 110,664 $ 24,296 $ 65,166 $ 21,202 13 PART I Item 1 (In millions) Fair Value Level Adjusted Cost Basis Unrealized Gains Unrealized Losses Recorded Basis Cash and Cash Equivalents Short-term Investments Equity and Other Investments June 30, 2025 Changes in Fair Value Recorded in Other Comprehensive Income Commercial paper Level 2 $ 10,880 $ 0 $ 0 $ 10,880 $ 9,939 $ 941 $ 0 Certificates of deposit Level 2 2,653 0 0 2,653 2,309 344 0 U.S. government securities Level 1 52,878 71 ( 1,462 ) 51,487 4,742 46,745 0 U.S. agency securities Level 2 2,686 0 0 2,686 496 2,190 0 Foreign government bonds Level 2 349 24 ( 9 ) 364 0 364 0 Mortgage- and asset-backed securities Level 2 2,558 10 ( 27 ) 2,541 0 2,541 0 Corporate notes and bonds Level 2 10,763 124 ( 101 ) 10,786 0 10,786 0 Corporate notes and bonds Level 3 2,511 65 ( 5 ) 2,571 0 111 2,460 Municipal securities Level 2 207 1 ( 7 ) 201 0 201 0 Municipal securities Level 3 104 0 ( 14 ) 90 0 90 0 Total debt investments $ 85,589 $ 295 $ ( 1,625 ) $ 84,259 $ 17,486 $ 64,313 $ 2,460 Changes in Fair Value Recorded in Net Income Equity investments Level 1 $ 4,577 $ 1,045 $ 0 $ 3,532 Equity investments Other 9,141 0 0 9,141 Total equity investments $ 13,718 $ 1,045 $ 0 $ 12,673 Cash $ 11,711 $ 11,711 $ 0 $ 0 Derivatives, net (a) 282 0 10 272 Total $ 109,970 $ 30,242 $ 64,323 $ 15,405 (a) Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments. Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments, measured using the equity method, or measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of December 31 , 2025 and June 30, 2025, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $ 5.0 billion and $ 2.9 billion, respectively, and equity investments measured using the equity method were $ 11.5 billion and $ 6.0 billion, respectively. 14 PART I Item 1 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 December 31, 2025 U.S. government and agency securities $ 350 $ ( 4 ) $ 28,600 $ ( 1,042 ) $ 28,950 $ ( 1,046 ) Foreign government bonds 48 ( 3 ) 83 ( 3 ) 131 ( 6 ) Mortgage- and asset-backed securities 0 0 202 ( 21 ) 202 ( 21 ) Corporate notes and bonds 432 ( 2 ) 2,318 ( 53 ) 2,750 ( 55 ) Municipal securities 0 0 162 ( 18 ) 162 ( 18 ) Total $ 830 $ ( 9 ) $ 31,365 $ ( 1,137 ) $ 32,195 $ ( 1,146 ) 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 December 31, 2025: (In millions) Adjusted Cost Basis Estimated Fair Value December 31, 2025 Due in one year or less $ 27,582 $ 27,509 Due after one year through five years 47,136 46,511 Due after five years through 10 years 4,110 4,213 Due after 10 years 1,346 1,276 Total $ 80,174 $ 79,509 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. 15 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 December 31 , 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) December 31, 2025 June 30, 2025 Designated as Hedging Instruments Foreign exchange contracts purchased $ 1,492 $ 1,492 Interest rate contracts purchased 1,166 1,150 Not Designated as Hedging Instruments Foreign exchange contracts purchased 8,884 15,214 Foreign exchange contracts sold 43,710 43,307 Equity contracts purchased 4,943 5,434 Equity contracts sold 2,189 2,189 Other contracts purchased 2,578 2,769 Other contracts sold 878 1,242 16 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 December 31, 2025 June 30, 2025 Designated as Hedging Instruments Foreign exchange contracts $ 78 $ ( 53 ) $ 89 $ ( 44 ) Interest rate contracts 14 0 15 0 Not Designated as Hedging Instruments Foreign exchange contracts 173 ( 438 ) 248 ( 809 ) Equity contracts 43 ( 407 ) 385 ( 983 ) Other contracts 12 ( 9 ) 21 ( 1 ) Gross amounts of derivatives 320 ( 907 ) 758 ( 1,837 ) Gross amounts of derivatives offset in the balance sheets ( 196 ) 197 ( 258 ) 260 Cash collateral received 0 ( 73 ) 0 ( 99 ) Net amounts of derivatives $ 124 $ ( 783 ) $ 500 $ ( 1,676 ) Reported as Short-term investments $ 6 $ 0 $ 10 $ 0 Other current assets 104 0 201 0 Equity and other investments 0 0 272 0 Other long-term assets 14 0 17 0 Other current liabilities 0 ( 715 ) 0 ( 1,639 ) Other long-term liabilities 0 ( 68 ) 0 ( 37 ) Total $ 124 $ ( 783 ) $ 500 $ ( 1,676 ) Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $ 295 million and $ 902 million, respectively, as of December 31, 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 December 31, 2025 Derivative assets $ 0 $ 314 $ 6 $ 320 Derivative liabilities 0 ( 907 ) 0 ( 907 ) June 30, 2025 Derivative assets 1 474 283 758 Derivative liabilities 0 ( 1,832 ) ( 5 ) ( 1,837 ) 17 PART I Item 1 Gains (losses) on derivative instruments recognized in other income (expense), net were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Designated as Fair Value Hedging Instruments Interest rate contracts Derivatives $ ( 1 ) $ ( 18 ) $ ( 2 ) $ 2 Hedged items ( 7 ) 8 ( 15 ) ( 24 ) Designated as Cash Flow Hedging Instruments Foreign exchange contracts Amount reclassified from accumulated other comprehensive loss ( 7 ) ( 106 ) ( 12 ) ( 57 ) Not Designated as Hedging Instruments Foreign exchange contracts ( 54 ) 1,138 327 755 Equity contracts 31 ( 111 ) 1610 ( 459 ) Other contracts 6 ( 26 ) 6 ( 2 ) Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Designated as Cash Flow Hedging Instruments Foreign exchange contracts Included in effectiveness assessment $ ( 9 ) $ ( 50 ) $ ( 16 ) $ ( 21 ) NOTE 6 — PROPERTY AND EQUIPMENT The components of property and equipment were as follows: (In millions) December 31, 2025 June 30, 2025 Land $ 9,698 $ 9,338 Buildings and improvements 163,986 137,921 Leasehold improvements 14,500 12,117 Servers, network equipment, and software 171,351 132,836 Furniture and equipment 6,541 6,407 Total, at cost 366,076 298,619 Accumulated depreciation ( 104,950 ) ( 93,653 ) Total, net $ 261,126 $ 204,966 Depreciation expense was $ 7.9 billion and $ 15.0 billion for the three and six months ended December 31, 2025, respectively, and $ 5.2 billion and $ 9.9 billion for the three and six months ended December 31, 2024, respectively. As of December 31, 2025 and June 30, 2025, purchases of property and equipment remaining in accounts payable were $ 23.1 billion and $ 6.9 billion, respectively. 18 PART I Item 1 NOTE 7 — GOODWILL Changes in the carrying amount of goodwill were as follows: (In millions) June 30, 2025 Acquisitions Other December 31, 2025 Productivity and Business Processes $ 31,457 $ 26 $ 21 $ 31,504 Intelligent Cloud 25,689 36 6 25,731 More Personal Computing 62,363 5 19 62,387 Total $ 119,509 $ 67 $ 46 $ 119,622 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 December 31, 2025 June 30, 2025 Marketing-related $ 16,502 $ ( 4,300 ) $ 12,202 $ 16,502 $ ( 3,901 ) $ 12,601 Technology-based 22,726 ( 16,830 ) 5,896 22,560 ( 14,959 ) 7,601 Customer-related 4,278 ( 2,357 ) 1,921 4,278 ( 2,050 ) 2,228 Contract-based 343 ( 73 ) 270 217 ( 43 ) 174 Total $ 43,849 $ ( 23,560 ) $ 20,289 $ 43,557 $ ( 20,953 ) $ 22,604 Intangible assets amortization expense was $ 1.2 billion and $ 2.6 billion for the three and six months ended December 31, 2025, respectively, and $ 1.5 billion and $ 3.0 billion for the three and six months ended December 31, 2024, respectively. The following table outlines the estimated future amortization expense related to intangible assets held as of December 31, 2025: (In millions) Year Ending June 30, 2026 (excluding the six months ended December 31, 2025) $ 2,063 2027 3,000 2028 2,068 2029 1,879 2030 1,412 Thereafter 9,867 Total $ 20,289 19 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 December 31, 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 % 2,701 2,700 2015 issuance of $ 23.8 billion 2035 – 2055 3.50 % – 4.75 % 3.60 % – 4.78 % 4,555 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 46,207 49,206 Unamortized discount and issuance costs ( 1,117 ) ( 1,155 ) Hedge fair value adjustments (a) ( 21 ) ( 36 ) Premium on debt exchange ( 4,807 ) ( 4,864 ) Total debt 40,262 43,151 Current portion of long-term debt ( 4,837 ) ( 2,999 ) Long-term debt $ 35,425 $ 40,152 (a) Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt. As of December 31, 2025 and June 30, 2025, the estimated fair value of long-term debt, including the current portion, was $ 37.3 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 December 31, 2025: (In millions) Year Ending June 30, 2026 (excluding the six months ended December 31, 2025) $ 0 2027 9,250 2028 0 2029 2,055 2030 0 Thereafter 34,902 Total $ 46,207 20 PART I Item 1 NOTE 10 — INCOME TAXES Effective Tax Rate Our effective tax rate was 20 % for both the three and six months ended December 31, 2025, and 18 % for both the three and six months ended December 31, 2024. The increase in our effective tax rate for the three and six months ended December 31, 2025 compared to the prior year was primarily due to deferred tax expense attributable to the dilution gain from the OpenAI Recapitalization and 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 and six months ended December 31, 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 December 31, 2025 and June 30, 2025, unrecognized tax benefits and other income tax liabilities were $ 28.7 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 December 31, 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 2021 and thereafter . NOTE 11 — UNEARNED REVENUE Unearned revenue by segment was as follows: (In millions) December 31, 2025 June 30, 2025 Productivity and Business Processes $ 39,721 $ 50,567 Intelligent Cloud 11,433 14,022 More Personal Computing 2,890 2,676 Total $ 54,044 $ 67,265 Changes in unearned revenue were as follows: (In millions) Six Months Ended December 31, 2025 Balance, beginning of period $ 67,265 Deferral of revenue 89,010 Recognition of unearned revenue ( 102,231 ) Balance, end of period $ 54,044 21 PART I Item 1 Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts expected to be invoiced and recognized as revenue in future periods, was $ 631 billion as of December 31, 2025. Estimating revenue that will be allocated to remaining performance obligations 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. Revenue allocated to remaining performance obligations related to the commercial portion of revenue was $ 625 billion as of December 31, 2025, with a weighted average duration of approximately 2.5 years. We expect to recognize approximately 25 % of both our total company remaining performance obligation revenue and commercial 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. The components of lease expense were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Operating lease cost $ 1,742 $ 1,293 $ 3,397 $ 2,453 Finance lease cost: Amortization of right-of-use assets $ 1,277 $ 830 $ 2,450 $ 1,524 Interest on lease liabilities 615 337 1,161 611 Total finance lease cost $ 1,892 $ 1,167 $ 3,611 $ 2,135 Supplemental cash flow information related to leases was as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,506 $ 962 $ 3,161 $ 2,169 Operating cash flows from finance leases 615 319 1,161 594 Financing cash flows from finance leases 701 480 1,340 1,282 Right-of-use assets obtained in exchange for lease obligations: Operating leases 1,477 3,098 2,894 4,991 Finance leases 6,330 6,435 15,477 10,767 22 PART I Item 1 Supplemental balance sheet information related to leases was as follows: (In millions, except lease term and discount rate) December 31, 2025 June 30, 2025 Operating Leases Operating lease right-of-use assets $ 25,103 $ 24,823 Other current liabilities $ 5,520 $ 5,424 Operating lease liabilities 17,345 17,437 Total operating lease liabilities $ 22,865 $ 22,861 Finance Leases Property and equipment, at cost $ 73,201 $ 53,876 Accumulated depreciation ( 12,556 ) ( 9,861 ) Property and equipment, net $ 60,645 $ 44,015 Other current liabilities $ 3,738 $ 3,172 Other long-term liabilities 56,413 43,000 Total finance lease liabilities $ 60,151 $ 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 % The following table outlines maturities of our lease liabilities as of December 31, 2025: (In millions) Year Ending June 30, Operating Leases Finance Leases 2026 (excluding the six months ended December 31, 2025) $ 3,248 $ 3,059 2027 5,811 6,404 2028 4,078 6,467 2029 2,891 5,829 2030 2,361 5,718 Thereafter 7,192 53,590 Total lease payments 25,581 81,067 Less imputed interest ( 2,716 ) ( 20,916 ) Total $ 22,865 $ 60,151 As of December 31, 2025, we had additional leases, primarily for datacenters, that had not yet commenced of $ 155.1 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. A preliminary hearing was held in December 2025. 23 PART I Item 1 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 December 31, 2025, we accrued aggregate legal liabilities of $ 575 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $ 400 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 December 31, 2025, $ 47.4 billion remained of this $ 60.0 billion share repurchase program. 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 Second Quarter 12 5,964 8 3,500 Total 20 $ 9,919 15 $ 6,300 All repurchases were made using cash resources. Shares repurchased during fiscal year 2026 were under the share repurchase program approved on September 16, 2024. Shares repurchased during 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 $ 1.5 billion and $ 3.1 billion for the three and six months ended December 31, 2025, respectively, and $ 1.5 billion and $ 2.8 billion for the three and six months ended December 31, 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 $ 6,762 December 2, 2025 February 19, 2026 March 12, 2026 0.91 6,760 Total $ 1.82 $ 13,522 Fiscal Year 2025 September 16, 2024 November 21, 2024 December 12, 2024 $ 0.83 $ 6,170 December 3, 2024 February 20, 2025 March 13, 2025 0.83 6,169 Total $ 1.66 $ 12,339 The dividend declared on December 2, 2025 was included in other current liabilities as of December 31, 2025. 24 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 December 31, Six Months Ended December 31, 2025 2024 2025 2024 Derivatives Balance, beginning of period $ ( 11 ) $ ( 13 ) $ ( 8 ) $ ( 3 ) Unrealized losses, net of tax of $( 2 ), $( 13 ) , $( 4 ), and $( 6 ) ( 9 ) ( 50 ) ( 16 ) ( 21 ) Reclassification adjustments for losses included in other income (expense), net 7 106 12 57 Tax benefit included in provision for income taxes ( 1 ) ( 22 ) ( 2 ) ( 12 ) Amounts reclassified from accumulated other comprehensive loss 6 84 10 45 Net change related to derivatives, net of tax of $( 1 ), $ 9 , $( 2 ) , and $ 6 ( 3 ) 34 ( 6 ) 24 Balance, end of period $ ( 14 ) $ 21 $ ( 14 ) $ 21 Investments Balance, beginning of period $ ( 364 ) $ ( 1,511 ) $ ( 1,051 ) $ ( 2,625 ) Unrealized gains (losses), net of tax of $( 45 ), $( 121 ), $ 140 , and $ 176 ( 170 ) ( 453 ) 525 665 Reclassification adjustments for losses included in other income (expense), net 11 24 1 19 Tax benefit included in provision for income taxes ( 2 ) ( 5 ) 0 ( 4 ) Amounts reclassified from accumulated other comprehensive loss 9 19 1 15 Net change related to investments, net of tax of $( 43 ), $( 116 ) , $ 140 , and $ 180 ( 161 ) ( 434 ) 526 680 Balance, end of period $ ( 525 ) $ ( 1,945 ) $ ( 525 ) $ ( 1,945 ) Translation Adjustments and Other Balance, beginning of period $ ( 2,386 ) $ ( 2,658 ) $ ( 2,288 ) $ ( 2,962 ) Translation adjustments and other, net of tax of $ 0 , $ 0 , $ 0 , and $ 0 223 ( 1,034 ) 125 ( 730 ) Balance, end of period $ ( 2,163 ) $ ( 3,692 ) $ ( 2,163 ) $ ( 3,692 ) Accumulated other comprehensive loss, end of period $ ( 2,702 ) $ ( 5,616 ) $ ( 2,702 ) $ ( 5,616 ) 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. 25 PART I Item 1 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. • 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. 26 PART I Item 1 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. Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Productivity and Business Processes Revenue $ 34,116 $ 29,437 $ 67,136 $ 57,754 Cost of revenue 6,110 5,569 11,831 10,863 Operating expenses 7,407 6,983 14,299 13,490 Operating income $ 20,599 $ 16,885 $ 41,006 $ 33,401 Intelligent Cloud Revenue $ 32,907 $ 25,544 $ 63,804 $ 49,636 Cost of revenue 13,566 9,405 25,880 18,019 Operating expenses 5,468 5,288 10,660 10,263 Operating income $ 13,873 $ 10,851 $ 27,264 $ 21,354 More Personal Computing Revenue $ 14,250 $ 14,651 $ 28,006 $ 27,827 Cost of revenue 6,302 6,825 12,310 13,016 Operating expenses 4,145 3,909 7,730 7,361 Operating income $ 3,803 $ 3,917 $ 7,966 $ 7,450 Total Revenue $ 81,273 $ 69,632 $ 158,946 $ 135,217 Cost of revenue 25,978 21,799 50,021 41,898 Operating expenses 17,020 16,180 32,689 31,114 Operating income $ 38,275 $ 31,653 $ 76,236 $ 62,205 No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three or six months ended December 31, 2025 or 2024. Revenue, classified by the major geographic areas in which our customers were located, was as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 United States (a) $ 41,410 $ 35,537 $ 81,487 $ 69,450 Other countries 39,863 34,095 77,459 65,767 Total $ 81,273 $ 69,632 $ 158,946 $ 135,217 (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. 27 PART I Item 1 Revenue, classified by significant product and service offerings, was as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Server products and cloud services $ 30,865 $ 23,641 $ 59,737 $ 45,796 Microsoft 365 Commercial products and cloud services 24,524 21,117 48,490 41,566 Gaming 5,958 6,581 11,466 12,202 LinkedIn 5,082 4,587 9,796 8,879 Windows and Devices 4,479 4,512 9,030 8,841 Search and news advertising 3,812 3,558 7,509 6,783 Microsoft 365 Consumer products and cloud services 2,305 1,821 4,509 3,548 Dynamics products and cloud services 2,204 1,913 4,340 3,762 Enterprise and partner services 2,038 1,892 4,060 3,820 Other 6 10 9 20 Total $ 81,273 $ 69,632 $ 158,946 $ 135,217 Our Microsoft Cloud revenue, which includes Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365, was $ 51.5 billion and $ 100.6 billion for the three and six months ended December 31, 2025, respectively, and $ 40.9 billion and $ 79.8 billion for the three and six months ended December 31, 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. 28 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 December 31, 2025, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month and six-month periods ended December 31, 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 / D ELOITTE & T OUCHE LLP Seattle, Washington January 28, 2026 29 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 second quarter of fiscal year 2026 compared with the second quarter of fiscal year 2025 included: • Microsoft Cloud revenue increased 26% to $51.5 billion. • Commercial remaining performance obligation increased 110% to $625 billion. • Microsoft 365 Commercial cloud revenue increased 17%. • Microsoft 365 Consumer cloud revenue increased 29%. • LinkedIn revenue increased 11%. • Dynamics 365 revenue increased 19%. • Azure and other cloud services revenue increased 39%. • Windows OEM and Devices revenue increased 1%. • Xbox content and services revenue decreased 5%. • Search and news advertising revenue excluding traffic acquisition costs increased 10%. 30 PART I Item 2 Industry Trends and Opportunities Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces. We have a long-term strategic partnership with OpenAI which was originally established in 2019. In October 2025, we signed a new definitive agreement with OpenAI that extends this partnership and continues to build on our shared vision to advance artificial intelligence responsibly and make its benefits broadly accessible. Microsoft is a major investor in OpenAI, and 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 increased reported revenue and did not have a material impact on reported expenses from our international operations for the three and six months ended December 31, 2025. 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. 31 PART I Item 2 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. 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 32 PART I Item 2 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 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 December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 Revenue $ 81,273 $ 69,632 17% $ 158,946 $ 135,217 18% Gross margin 55,295 47,833 16% 108,925 93,319 17% Operating income 38,275 31,653 21% 76,236 62,205 23% Net income 38,458 24,108 60% 66,205 48,775 36% Diluted earnings per share 5.16 3.23 60% 8.87 6.53 36% Adjusted net income (non-GAAP) 30,875 25,047 23% 61,708 50,237 23% Adjusted diluted earnings per share (non-GAAP) 4.14 3.35 24% 8.27 6.73 23% 33 PART I Item 2 Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024 Revenue increased $11.6 billion or 17% driven by Intelligent Cloud and Productivity and Business Processes, offset in part by More Personal Computing. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Microsoft 365 Commercial cloud. More Personal Computing revenue decreased driven by Gaming, offset in part by Search and news advertising as well as Windows OEM. Cost of revenue increased $4.2 billion or 19% driven by growth in Microsoft Cloud. Gross margin increased $7.5 billion or 16% with growth across each of our segments. • Gross margin percentage decreased slightly driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud and sales mix shift to higher margin businesses. • Microsoft Cloud gross margin percentage decreased to 67% driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud. Operating expenses increased $840 million or 5% driven by research and development investments in compute capacity and AI talent, as well as impairment charges in our Gaming business. Operating income increased $6.6 billion or 21% driven by growth in Productivity and Business Processes and Intelligent Cloud. Revenue, gross margin, and operating income each included a favorable 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 $7.6 billion and $1.02, 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 $939 million and $0.12, respectively. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024 Revenue increased $23.7 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 Search and news advertising and Windows OEM, offset in part by Gaming and Devices. Cost of revenue increased $8.1 billion or 19% driven by growth in Microsoft Cloud. Gross margin increased $15.6 billion or 17% with growth across each of our segments. • Gross margin percentage decreased slightly driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains across the Microsoft Cloud and sales mix shift to higher margin businesses. • Microsoft Cloud gross margin percentage decreased to 67% driven by continued investments in AI infrastructure and growing AI product usage, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud. Operating expenses increased $1.6 billion or 5% driven by research and development investments in compute capacity and AI talent, as well as impairment charges in our Gaming business. Operating income increased $14.0 billion or 23% with growth across each of our segments. Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 2%, and 3%, respectively. 34 PART I Item 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 $1.5 billion and $0.20, respectively. SEGMENT RESULTS OF OPERATIONS (In millions, except percentages) Three Months Ended December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 Productivity and Business Processes Revenue $ 34,116 $ 29,437 16% $ 67,136 $ 57,754 16% Cost of revenue 6,110 5,569 10% 11,831 10,863 9% Operating expenses 7,407 6,983 6% 14,299 13,490 6% Operating income $ 20,599 $ 16,885 22% $ 41,006 $ 33,401 23% Intelligent Cloud Revenue $ 32,907 $ 25,544 29% $ 63,804 $ 49,636 29% Cost of revenue 13,566 9,405 44% 25,880 18,019 44% Operating expenses 5,468 5,288 3% 10,660 10,263 4% Operating income $ 13,873 $ 10,851 28% $ 27,264 $ 21,354 28% More Personal Computing Revenue $ 14,250 $ 14,651 (3)% $ 28,006 $ 27,827 1% Cost of revenue 6,302 6,825 (8)% 12,310 13,016 (5)% Operating expenses 4,145 3,909 6% 7,730 7,361 5% Operating income $ 3,803 $ 3,917 (3)% $ 7,966 $ 7,450 7% Total Revenue $ 81,273 $ 69,632 17% $ 158,946 $ 135,217 18% Cost of revenue 25,978 21,799 19% 50,021 41,898 19% Operating expenses 17,020 16,180 5% 32,689 31,114 5% Operating income $ 38,275 $ 31,653 21% $ 76,236 $ 62,205 23% Reportable Segments Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 2024 Productivity and Business Processes Revenue increased $4.7 billion or 16%. • Microsoft 365 Commercial products and cloud services revenue increased $3.4 billion or 16%. Microsoft 365 Commercial cloud revenue grew 17% 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 13% driven by Windows Commercial on-premises components of Microsoft 365 suite sales, as well as an increase in Office 2024 transactional purchasing. • Microsoft 365 Consumer products and cloud services revenue increased $484 million or 27%. Microsoft 365 Consumer cloud revenue grew 29% driven by growth in revenue per user and Microsoft 365 Consumer subscriber growth of 6%. • LinkedIn revenue increased $495 million or 11% driven by growth in Marketing Solutions. • Dynamics products and cloud services revenue increased $291 million or 15% driven by growth in Dynamics 365. Dynamics 365 revenue grew 19% with growth across all workloads. 35 PART I Item 2 Operating income increased $3.7 billion or 22%. • Cost of revenue increased $541 million or 10% driven by growth in Microsoft 365 Commercial cloud. • Gross margin increased $4.1 billion or 17% driven by growth in Microsoft 365 Commercial cloud. Gross margin percentage increased primarily driven by efficiency gains in Microsoft 365 Commercial cloud even with continued investments in AI infrastructure and growing AI product usage. • Operating expenses increased $424 million or 6% driven by research and development investments in compute capacity and AI talent, as well as higher advertising expenses. Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 2%, and 3%, respectively. Intelligent Cloud Revenue increased $7.4 billion or 29%. • Server products and cloud services revenue increased $7.2 billion or 31% driven by Azure and other cloud services. Azure and other cloud services revenue grew 39% driven by demand for our portfolio of services with continued growth across all workloads. Server products revenue increased 2% driven by demand for our hybrid solutions, with benefit from the launch of SQL Server 2025, and higher transactional purchasing. • Enterprise and partner services revenue increased $146 million or 8% driven by growth in Enterprise Support Services. Operating income increased $3.0 billion or 28%. • Cost of revenue increased $4.2 billion or 44% driven by growth in Azure. • Gross margin increased $3.2 billion or 20% driven by growth in Azure. Gross margin percentage decreased driven by the continued investments in AI infrastructure and sales mix shift to Azure, offset in part by efficiency gains in Azure. • Operating expenses increased $180 million or 3% driven by research and development investments in compute capacity and AI talent. Cost of revenue included an unfavorable foreign currency impact of 2%. More Personal Computing Revenue decreased $401 million or 3%. • Windows and Devices revenue decreased slightly. Windows OEM and Devices revenue increased 1% driven by Windows OEM growth of 5% with continued benefit from Windows 10 end of support and inventory levels that remained elevated, offset in part by a decline in Devices. • Gaming revenue decreased $623 million or 9% driven by declines in Xbox hardware and Xbox content and services. Xbox hardware revenue decreased 32% driven by lower volume of consoles sold. Xbox content and services revenue decreased 5% on a prior year comparable that benefited from strong first-party content performance. • Search and news advertising revenue increased $254 million or 7%. Search and news advertising revenue excluding traffic acquisition costs increased 10% driven by higher search volume and continued benefit from third-party partnerships. 36 PART I Item 2 Operating income decreased $114 million or 3%. • Cost of revenue decreased $523 million or 8% driven by lower hardware sales. • Gross margin increased $122 million or 2% driven by growth in Search and news advertising and Windows OEM, offset in part by Gaming. Gross margin percentage increased driven by sales mix shift to higher margin businesses. • Operating expenses increased $236 million or 6% driven by impairment charges in our Gaming business and research and development investments in compute capacity and AI talent. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024 Productivity and Business Processes Revenue increased $9.4 billion or 16%. • Microsoft 365 Commercial products and cloud services revenue increased $6.9 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, and continued Microsoft 365 Commercial seat growth. Microsoft 365 Commercial products revenue grew 15% driven by Windows Commercial on-premises components of Microsoft 365 suite sales, as well as an increase in Office 2024 transactional purchasing. • Microsoft 365 Consumer products and cloud services revenue increased $961 million or 27%. Microsoft 365 Consumer cloud revenue grew 27% driven by growth in revenue per user and continued growth in Microsoft 365 Consumer subscribers. • LinkedIn revenue increased $917 million or 10% driven by growth in Marketing Solutions. • Dynamics products and cloud services revenue increased $578 million or 15% driven by growth in Dynamics 365. Dynamics 365 revenue grew 19% with growth across all workloads. Operating income increased $7.6 billion or 23%. • Cost of revenue increased $968 million or 9% driven by growth in Microsoft 365 Commercial cloud. • Gross margin increased $8.4 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 the impact of investments in AI infrastructure and growing AI product usage. • Operating expenses increased $809 million or 6% driven by research and development investments in compute capacity and AI talent, as well as higher advertising expenses. Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 3%, and 3%, respectively. Intelligent Cloud Revenue increased $14.2 billion or 29%. • Server products and cloud services revenue increased $13.9 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 2% driven by higher transactional purchasing and demand for our hybrid solutions, with benefit from the launch of SQL Server 2025. • Enterprise and partner services revenue increased $240 million or 6% driven by growth in Enterprise Support Services. Operating income increased $5.9 billion or 28%. • Cost of revenue increased $7.9 billion or 44% driven by growth in Azure. 37 PART I Item 2 • Gross margin increased $6.3 billion or 20% driven by growth in Azure. Gross margin percentage decreased driven by the continued investments in AI infrastructure and sales mix shift to Azure, offset in part by efficiency gains in Azure. • Operating expenses increased $397 million or 4% driven by research and development investments in compute capacity and AI talent. Revenue included a favorable foreign currency impact of 2%. Cost of revenue included an unfavorable foreign currency impact of 2%. More Personal Computing Revenue increased $179 million or 1%. • Windows and Devices revenue increased $189 million or 2%. Windows OEM and Devices revenue increased 3% driven by Windows OEM growth of 11% with benefit from Windows 10 end of support and inventory levels that remained elevated, offset in part by a decline in Devices. • Gaming revenue decreased $736 million 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 2% driven by a decline in first-party content, offset in part by growth in Xbox Game Pass and third-party content. • Search and news advertising revenue increased $726 million or 11%. Search and news advertising revenue excluding traffic acquisition costs increased 13% driven by higher search volume and continued benefit from third-party partnerships. Operating income increased $516 million or 7%. • Cost of revenue decreased $706 million or 5% driven by lower hardware sales, offset in part by growth in Search and news advertising. • Gross margin increased $885 million or 6% 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 $369 million or 5% driven by impairment charges in our Gaming business and research and development investments in compute capacity and AI talent. OPERATING EXPENSES Research and Development (In millions, except percentages) Three Months Ended December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 Research and development $ 8,504 $ 7,917 7% $ 16,650 $ 15,461 8% As a percent of revenue 10% 11% (1)ppt 10% 11% (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 December 31, 2025 Compared with Three Months Ended December 31, 2024 Research and development expenses increased $587 million or 7% driven by investments in compute capacity and AI talent and impairment charges in our Gaming business. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024 Research and development expenses increased $1.2 billion or 8% driven by investments in compute capacity and AI talent and impairment charges in our Gaming business. 38 PART I Item 2 Sales and Marketing (In millions, except percentages) Three Months Ended December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 Sales and marketing $ 6,584 $ 6,440 2% $ 12,301 $ 12,157 1% 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 December 31, 2025 Compared with Three Months Ended December 31, 2024 Sales and marketing expenses increased $144 million or 2% driven by higher advertising expenses. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024 Sales and marketing expenses increased $144 million or 1% driven by higher advertising expenses. General and Administrative (In millions, except percentages) Three Months Ended December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 General and administrative $ 1,932 $ 1,823 6% $ 3,738 $ 3,496 7% As a percent of revenue 2% 3% (1)ppt 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 December 31, 2025 Compared with Three Months Ended December 31, 2024 General and administrative expenses increased $109 million or 6% driven by higher legal expenses. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 2024 General and administrative expenses increased $242 million or 7% driven by higher legal expenses. OTHER INCOME (EXPENSE), NET The components of other income (expense), net were as follows: (In millions) Three Months Ended December 31, Six Months Ended December 31, 2025 2024 2025 2024 Interest and dividends income $ 840 $ 600 $ 1,816 $ 1,281 Interest expense (736 ) (594 ) (1,434 ) (1,176 ) Net recognized gains (losses) on investments 339 (860 ) (233 ) (397 ) Net gains (losses) on derivatives 37 (116 ) 1,616 (454 ) Net gains (losses) on foreign currency remeasurements (50 ) (153 ) (72 ) 23 Other, net 9,541 (1,165 ) 4,618 (1,848 ) Total $ 9,971 $ (2,288 ) $ 6,311 $ (2,571 ) 39 PART I Item 2 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 $10.0 billion and $5.9 billion of net gains for the three and six months ended December 31, 2025, respectively, and $1.2 billion and $1.9 billion of net losses for the three and six months ended December 31, 2024, 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 three and six months ended December 31, 2025 primarily relate to the dilution gain from the OpenAI Recapitalization. Three Months Ended December 31, 2025 Compared with Three Months Ended December 31, 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 gains on investments increased primarily due to lower impairments and higher gains on equity securities 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. Six Months Ended December 31, 2025 Compared with Six Months Ended December 31, 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 decreased primarily due to lower impairments, offset in part by 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 gains (losses) on equity method investments, including OpenAI. INCOME TAXES Effective Tax Rate Our effective tax rate was 20% for both the three and six months ended December 31, 2025, and 18% for both the three and six months ended December 31, 2024. The increase in our effective tax rate for the three and six months ended December 31, 2025 compared to the prior year was primarily due to deferred tax expense attributable to the dilution gain from the OpenAI Recapitalization and 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 and six months ended December 31, 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 December 31, 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 2021 and thereafter. 40 PART I Item 2 NON-GAAP FINANCIAL MEASURES Adjusted other income (expense), net, adjusted net income, and adjusted diluted EPS are non-GAAP financial measures which exclude net (gains) losses from investments in OpenAI. We believe these non-GAAP measures aid investors by providing additional insight into our financial performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results: (In millions, except percentages and per share amounts) Three Months Ended December 31, Percentage Change Six Months Ended December 31, Percentage Change 2025 2024 2025 2024 Other income (expense), net $ 9,971 $ (2,288 ) 536% $ 6,311 $ (2,571 ) 345% Net (gains) losses from investments in OpenAI (9,978 ) 1,236 (907)% (5,917 ) 1,924 (408)% Adjusted other income (expense), net (non-GAAP) $ (7 ) $ (1,052 ) 99% $ 394 $ (647 ) 161% Net income $ 38,458 $ 24,108 60% $ 66,205 $ 48,775 36% Net (gains) losses from investments in OpenAI, net of tax of $2,395 , $(297), $1,420 , and $(462) (7,583 ) 939 (908)% (4,497 ) 1,462 (408)% Adjusted net income (non-GAAP) $ 30,875 $ 25,047 23% $ 61,708 $ 50,237 23% Diluted earnings per share $ 5.16 $ 3.23 60% $ 8.87 $ 6.53 36% Net (gains) losses from investments in OpenAI (1.02 ) 0.12 (950)% (0.60 ) 0.20 (400)% Adjusted diluted earnings per share (non-GAAP) $ 4.14 $ 3.35 24% $ 8.27 $ 6.73 23% 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 $89.5 billion and $94.6 billion as of December 31, 2025 and June 30, 2025, respectively. Equity and other investments were $21.2 billion and $15.4 billion as of December 31, 2025 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. 41 PART I Item 2 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. 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 $24.3 billion to $80.8 billion for the six months ended December 31, 2025, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers. Cash used in financing increased $1.6 billion to $29.4 billion for the six months ended December 31, 2025, primarily due to a $4.0 billion increase in common stock repurchases, offset in part by a $3.7 billion decrease in cash used for repayments of debt. Cash used in investing increased $28.0 billion to $57.3 billion for the six months ended December 31, 2025, primarily due to an $18.5 billion increase in additions to property and equipment, a $5.9 billion increase in other investing to facilitate the purchase of components, and a $5.7 billion increase in cash used in 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. 42 PART I Item 2 The following table outlines the expected future recognition of unearned revenue as of December 31, 2025: (In millions) Three Months Ending March 31, 2026 $ 26,335 June 30, 2026 15,812 September 30, 2026 6,350 December 31, 2026 2,879 Thereafter 2,668 Total $ 54,044