Microsoft Corporation

Revenue and profit rest mainly on business spending on cloud and productivity software, and all three segments were profitable. Segment profits depend partly on how the company allocates shared costs, including AI infrastructure, between them.

Microsoft makes most of its money selling cloud services and software to businesses: in fiscal 2026 its Productivity and Business Processes segment (Office and other productivity software, LinkedIn and Dynamics) earned operating income of $83,879 million on revenue of $139,996 million, and Intelligent Cloud (Azure and server products) earned $56,972 million on revenue of $137,791 million.^[1][2] The smaller More Personal Computing segment (Windows, devices, XBOX and search advertising) earned $14,386 million on revenue of $54,052 million.^[3] Microsoft Cloud revenue, which runs across several of these businesses, was $214.4 billion, up from $168.9 billion a year earlier.^[4] The two largest product lines were server products and cloud services at $129,425 million and Microsoft 365 Commercial products and cloud services at $101,997 million.^[5] The company says that, even as it moves to cloud subscriptions, licensing software still generates a substantial portion of its software revenue.^[6]

First because every other finding is read against Microsoft's revenue and profit sources; the evidence is clear and all three segments are profitable.

Operating cash still covers the building programme, but the gap is narrowing, cash balances are falling and the company itself links future funding to capital markets. One year of accelerated spending cannot show what return the new capacity will earn.

So far Microsoft is paying for its expansion from operating cash, but spending is rising faster: in fiscal 2026 cash from operations rose $46.8 billion to $182.9 billion, while additions to property and equipment rose $51.4 billion.^[1][2] Additions to property and equipment were $115,948 million, against $64,551 million and $44,477 million in the two years before; cash from operations in the same three years was $182,935 million, $136,162 million and $118,548 million.^[3][4] A further $26.7 billion of equipment purchases was still unpaid at the year-end, against $6.9 billion a year earlier.^[5] Cash, cash equivalents and short-term investments fell to $76.8 billion from $94.6 billion; the company says these, its operating cash flows and access to capital markets will be sufficient for at least the next 12 months and for the foreseeable future.^[6][7] It also warns that its AI investments need substantial and increasing capital expenditure and continued access to capital, and are being made ahead of fully developed revenue streams.^[8]

Second because capital spending is growing faster than operating cash and the company says it is made ahead of fully developed revenue, which makes funding the build-out the central financial question for Microsoft; the figures are firm, but the outcome is not yet known.

These commitments fix much of the cost of future datacenter capacity, which reduces flexibility if AI demand grows more slowly than planned; the company itself warns that overestimating demand could leave infrastructure underused and lead to impairments. The report does not show how the leases not yet started relate to the lease total in the obligations table.

Microsoft's largest obligations are its datacenter commitments, not its bonds: at the end of fiscal 2026 contractual payments totalled $743,821 million, including $443,506 million for operating and finance leases (with interest) and $194,060 million of purchase commitments, against $46,136 million of debt principal.^[1][2] Of the total, $241,922 million falls due in fiscal 2027, including $169,008 million of purchase commitments and $29,848 million of construction commitments.^[1] The company says the purchase commitments mainly relate to datacenters and include open purchase orders and take-or-pay contracts.^[3] The report separately discloses $329.1 billion of leases, mainly for datacenters, that had not yet begun; they start between fiscal 2027 and fiscal 2033, run for 1 to 20 years, and some depend on contractual conditions being met. It does not say whether any of these are already included in the obligations table, so the two figures should not be added together.^[4] Finance lease liabilities already on the balance sheet rose to $66,594 million from $46,172 million.^[5]

Needs attention: lease and purchase commitments, mainly for datacenters, far exceed Microsoft's debt and fix much of the cost of future capacity; placed just after finding 2 because these are the obligations that funding has to meet.

OpenAI is at once a customer, a partner, a source of technology and an investment, so a change in its position could affect Microsoft's revenue, receivables and reported profit together. The report does not give the carrying value of the investment or how much of the contracted backlog relates to OpenAI.

Microsoft's main related party is OpenAI, in which it holds an equity-method investment representing about 25% on an as-converted basis.^[1] In fiscal 2026 Microsoft recorded $24.1 billion of revenue from commercial arrangements with OpenAI, including revenue-sharing payments, and OpenAI owed it $6.0 billion at the year-end.^[2] Microsoft has committed $13.0 billion of funding to OpenAI, of which $11.9 billion had been paid.^[2] The investment also moves reported profit: other income included $6.5 billion of net gains from OpenAI in fiscal 2026, mainly a dilution gain after OpenAI's recapitalisation in October 2025, after net losses of $4.8 billion in fiscal 2025.^[3][4] The company warns that some partners are also significant Azure customers and that the benefits it expects from these relationships may not be realised or sustained.^[5]

Needs attention: OpenAI is at once a large customer, a debtor, a partner and an investment that swings other income; placed below findings 2 and 3 because it touches a narrower part of the business than the build-out as a whole.

Operating profit grew strongly, but part of the jump in net income came from investment gains that may not recur and can reverse, as the OpenAI losses a year earlier show. The adjusted figures are the company's own non-GAAP measures.

Most of Microsoft's profit comes from its operations: operating income was $155,237 million in fiscal 2026, up 21%, while net income rose 31% to $133,749 million.^[1] Net income was lifted by other income of $10,697 million, against a net expense of $4,901 million a year earlier, including gains of $4,385 million on investments and $1,867 million on derivatives.^[2] Excluding OpenAI gains and losses, the company's adjusted net income was $128,786 million, up 22%; OpenAI added $4,963 million after tax in fiscal 2026, after reducing net income by $3,620 million in fiscal 2025.^[3] Operating expenses also included impairment and other related expenses in the XBOX business, for which the report gives no amount.^[4]

Placed here because net income grew much faster than operating income on OpenAI and other investment gains, which a reader must separate before judging any trend in this report; it complements finding 4 by showing the effect on the income statement as a whole.

An adverse outcome could require a large cash payment and raise the tax charge, although the company says its provisions are adequate. The report does not say how its provisions relate to the IRS claim or when the dispute may be resolved.

Microsoft faces a large unresolved US tax claim: for tax years 2004 to 2013 the IRS is seeking an additional $28.9 billion plus penalties and interest, mainly over intercompany transfer pricing.^[1] Microsoft disagrees and says it will contest the claim through the IRS appeals office and, if necessary, the courts, and that its tax provisions are adequate.^[2] At 30 June 2026 it carried $25.8 billion of gross unrecognised tax benefits, mostly in long-term income taxes, and $9.4 billion of accrued interest on uncertain tax positions, up from $8.2 billion.^[3][4] The auditor made these uncertain tax positions a critical audit matter because the unresolved transfer-pricing issues are complex and subjective.^[5] The effective tax rate was 19%, against 18% a year earlier, kept below the US rate by its Irish operations, which generated 81% of foreign income before tax.^[6][7]

Needs attention: a disputed IRS claim, which the auditor treats as a critical audit matter, could require a large cash payment; placed below findings 2 to 5 because it is a single contingent matter rather than an exposure running through the business, and the company says its provisions are adequate.

Cash generation supports the reported profits. Part of the fiscal 2026 increase came from lower tax payments and deferred taxes, which may not repeat, particularly if the tax dispute goes against the company.

Reported profit has consistently turned into cash: cash from operations was $182,935 million, $136,162 million and $118,548 million in the last three years, against net income of $133,749 million, $101,832 million and $88,136 million.^[1][2] The main items added back in fiscal 2026 were depreciation, amortisation and other charges of $38,534 million, stock-based pay of $12,405 million and deferred income taxes of $14,189 million, while investment and derivative gains of $11,047 million were taken out.^[1] The company says the increase came mainly from more cash received from customers and less cash paid in income taxes, partly offset by more cash paid to suppliers.^[3] Income taxes paid fell to $21,188 million from $28.7 billion, and advance payments from customers added $9,361 million through unearned revenue.^[4][5]

Placed after the funding, obligation and profit findings because it is this operating cash that pays for the build-out; the evidence of consistent conversion is strong, so it supports rather than questions the findings above it.

The backlog gives unusual visibility of future revenue for a software company. But the report does not say what drove the 84% rise or how concentrated it is among a few large customers, such as OpenAI, and commitments can be renegotiated, so how durable it is cannot be judged.

Microsoft has a large and fast-growing book of contracted revenue: $684 billion was allocated to remaining performance obligations at 30 June 2026, of which $678 billion was commercial.^[1] Commercial remaining performance obligation rose 84% in the year.^[3] The company expects to recognise about 30% over the next 12 months, and the commercial portion has a weighted average duration of about 2.3 years.^[1][2] Unearned revenue, part of this total, was $75,712 million, up from $67,265 million.^[4] The company notes that estimating these amounts involves significant judgement, including possible renegotiation of commitments.^[5]

Moved in from the later questions for a software company: contracted future revenue is the main evidence of recurring demand; placed below finding 7 because what drove its sharp rise and how concentrated it is are not disclosed (see finding 20).

Growth came from more usage and higher revenue per user in cloud services rather than from acquisitions, so it says something about underlying demand. One year's growth rates cannot show how long AI-driven demand will last.

Revenue is growing: it rose $50.1 billion, or 18%, to $331,839 million in fiscal 2026, which the company attributes mainly to Microsoft Cloud.^[1][2] Azure and other cloud services revenue grew 41% on demand across the platform.^[3] Microsoft 365 Commercial cloud revenue grew 17%, from both more paid seats (up 6%) and higher revenue per user from add-ons such as Microsoft 365 Copilot.^[4] Currency movements added 2%, and acquisitions played little part: $1,743 million was spent on acquisitions and similar purchases in fiscal 2026, against $69,132 million in fiscal 2024.^[5][6] More Personal Computing revenue fell, driven by XBOX.^[1]

Placed below the build-out, OpenAI and tax findings because the growth it describes is clear and well documented and adds little uncertainty; finding 8 shows how much of that demand is already contracted.

Operating margins still widened because operating expenses grew more slowly than revenue, but rising depreciation from the build-out is already lowering gross margins. The report does not say where cloud gross margins are expected to settle.

Margins are mixed: gross margin grew 16% against revenue growth of 18%, while operating income grew 21%.^[1] The company says the gross margin percentage fell slightly and the Microsoft Cloud gross margin percentage fell to 66%, because of continued investment in AI infrastructure and growing AI usage, partly offset by efficiency gains.^[2] The effect is clearest in Intelligent Cloud, where cost of revenue rose 44% against revenue growth of 30%.^[3] Depreciation expense rose to $34.3 billion from $22.0 billion and $15.2 billion in the two years before.^[4] The company warns that its cloud and AI investments will continue to increase operating costs and may reduce operating margins.^[5]

Shows the first cost of the AI build-out in the income statement; placed after finding 9 because operating margins still widened, so the effect so far is confined to gross margin.

With server assets growing this fast, the assumed lives are one of the largest judgements behind reported margins: shorter lives for AI equipment would mean higher depreciation each year. The reports do not show how long AI servers actually stay in use, so whether six years is right cannot be judged from them.

Microsoft depreciates its servers and network equipment on a straight-line basis over estimated useful lives of two to six years.^[1] It has lengthened these lives twice: server lives went from three to four years from fiscal 2021, which the company says raised operating income by $2.7 billion and net income by $2.3 billion in that year, and server and network equipment lives went from four to six years from fiscal 2023.^[2][3] The equipment these lives apply to has grown fast: servers, network equipment and software at cost were $215,874 million at 30 June 2026, against $132,836 million a year earlier, and depreciation expense rose to $34.3 billion from $22.0 billion.^[4][5] Useful lives are not among the critical accounting estimates the company lists, and the report gives no figure for how profit would change if the lives were shorter.^[6]

Not stated in the reports: The report does not say how much profit would change if server lives were shorter, or whether the lives used suit AI equipment.

A company-specific question in place of the inventory question, which does not suit a software company. Needs attention because server assets are growing fast on lives the company has lengthened twice, but placed below findings 7 to 10 because it is an accounting judgement behind the cost already shown in finding 10 and the reports give no figure for its effect.

Securing scarce components appears to require Microsoft to commit large sums to its supply chain, which ties part of its cash to suppliers' performance. The report does not name the suppliers or the counterparties to these receivables, or say when they are repaid.

Microsoft depends on a small number of suppliers for key datacenter parts: it says there are limited suppliers for certain critical components, that these are in short supply, and that it has already experienced shortages of semiconductors, networking equipment, power systems and cooling equipment.^[1][2] It is also putting its own money into the supply chain: receivables from activities to help purchase server components rose to $27.8 billion from $8.2 billion, and cash used in other investing rose $22.2 billion, which the company says was mainly to help purchase components.^[3][4] A further $11.3 billion of investments was restricted under a supplier agreement, as noted in the finding on cash and liquidity.^[5] It also relies on third parties, including colocation facilities, leased datacenters and other cloud providers, for parts of its operations; the report does not name its main suppliers or set out the terms of the component arrangements.^[6]

Not stated in the reports: The report does not name the main suppliers or explain the terms of the component-purchase receivables.

Needs attention: the reports show shortages of key components and steeply rising receivables from arrangements to help purchase them; placed below finding 11 because the terms and counterparties are not disclosed, so the size of the risk is harder to judge. The same receivables appear in finding 14 as a liquidity item.

The customer base is broad, with one large exception in OpenAI. The report does not name other large Azure customers or say how much of the contracted backlog they account for.

No single customer accounted for more than 10% of revenue in any of the last three years.^[1] The largest disclosed relationship is OpenAI, from which Microsoft recorded $24.1 billion of revenue in fiscal 2026.^[2] The company warns that strategic partners and other customers may change their purchasing, so that expected consumption may be delayed, reduced or decline over time.^[3] Sales are spread across direct sales to enterprises, public bodies and smaller businesses and a broad partner network; customers in the United States generated $170,794 million of revenue and those elsewhere $161,045 million.^[4][5]

Mixed: the customer base is broad, with OpenAI the one large exception; placed below finding 12 because the OpenAI dependence is already covered in finding 4, and this finding adds the breadth of the rest.

Large liquid holdings, continuing operating cash flow and a AAA rating support near-term needs. Balances are falling as the build-out absorbs cash, and the report does not describe any committed bank credit lines.

Microsoft held $76,843 million of cash, cash equivalents and short-term investments at the year-end, down from $94,565 million, mostly in highly liquid investment-grade securities.^[1][2] Of its short-term investments, $3.8 billion was restricted under a supplier agreement, part of $11.3 billion of restricted investments in all.^[3] It also had $27.8 billion of receivables from arrangements to help purchase server components, up from $8.2 billion.^[4] Current assets of $207,710 million exceeded current liabilities of $168,825 million.^[5][6] Its long-term unsecured debt was rated AAA, and the company says its cash, operating cash flows and access to capital markets will be sufficient for at least the next 12 months.^[7][8]

Placed here as the counterpart to finding 2: the reports show ample liquidity and a top credit rating, so it is less pressing than the findings above, though falling balances and restricted investments (see finding 12) keep it in view.

Bond repayments are small next to the company's cash generation and do not depend on refinancing. The larger fixed payments are the lease and purchase commitments for datacenters, not the debt.

Debt repayments are modest: $9,250 million of principal falls due in fiscal 2027, none in fiscal 2028 and $2,001 million in fiscal 2029, out of $46,136 million in total.^[1] The current portion of long-term debt rose to $9,227 million from $2,999 million.^[2] Microsoft issued no new debt in fiscal 2026 or fiscal 2025 and repaid $3,000 million in fiscal 2026.^[3] The debt is senior and unsecured; the only borrowing-condition terms described are in derivative agreements, which require an investment-grade rating and minimum liquidity of $1.0 billion, and with a AAA rating no collateral was required.^[4][5][6]

Placed below finding 14 because debt maturities are small, spread out and do not depend on refinancing; the larger fixed payments are the commitments in finding 3.

On the figures shown, earnings and cash comfortably exceed borrowings and interest. The growth is in lease obligations, and additional leases not yet started will come on top.

Microsoft's total debt was $40,294 million at the year-end, down from $43,151 million; for comparison, operating income was $155,237 million and cash from operations $182,935 million in fiscal 2026.^[1][4][5] Lease liabilities add to this: finance lease liabilities were $66,594 million, up from $46,172 million, and operating lease liabilities $21,925 million.^[2][3] Interest expense was $3,051 million, up from $2,385 million, which the company attributes mainly to higher finance lease interest.^[6][7]

Placed after finding 15 because debt is small against earnings and cash; it mainly confirms that leases (see findings 3 and 33), not borrowings, are the obligation to watch.

The auditor issued an unmodified opinion and found internal controls effective; its two critical audit matters point to the areas that depend most on management's judgement. A critical audit matter is not a qualification of the opinion, and an audit does not guarantee that every figure is right.

The auditor, Deloitte & Touche LLP, issued an unmodified opinion: it found that the financial statements present fairly, in all material respects, the company's financial position.^[1] It did report two critical audit matters, which are areas that involved especially challenging, subjective or complex judgement rather than findings of error.^[2] The first is revenue recognition for certain customer agreements, where the audit effort was extensive because of the judgements involved and the volume of transactions.^[3] The second is uncertain tax positions on transfer-pricing issues unresolved with the IRS.^[4] Deloitte has audited the company since 1983 and also found its internal control over financial reporting effective.^[5][6]

The unmodified opinion underpins every figure in this report, but it sits low because nothing adverse was reported and its tax matter is covered in finding 6.

The quantified legal exposure is small against the company's earnings, but the claims over AI training and output are new and unquantified, so the overall exposure cannot be measured from the reports.

Management says it believes resolving the claims against the company will not have a material adverse impact, although its view may change; the amounts it quantifies are accrued legal liabilities of $553 million at 30 June 2026, with up to about $400 million more reasonably possible.^[5][1] A year earlier the figures were $541 million and about $600 million.^[2] The main named matter is a fine imposed on LinkedIn in October 2024 by the Irish Data Protection Commission under EU data protection rules (GDPR), which LinkedIn has appealed; the report does not give the amount.^[3] The company also faces copyright and other claims over AI training, inference and output, which it does not quantify.^[4]

Mixed because the claims over AI training and output are unquantified; placed below the larger financial findings because the amounts quantified are small, and the material tax dispute is in finding 6.

This report is a picture at 30 June 2026. Developments since then, including any change in AI spending plans or in the OpenAI relationship, are not covered.

The reports do not say: the annual report, with an audit report dated 29 July 2026, is the latest on the site and describes no material developments after 30 June 2026.^[1][2] The only later events it records are routine: a dividend of $0.91 a share, $6,759 million in total, payable on 10 September 2026, and the annual shareholder meeting on 8 December 2026.^[3][4]

Not stated in the reports: The reports on the site do not cover any period after the year-end, so later results and developments are not available.

Placed near the end as a reminder of the report's date: the reports give nothing beyond routine items after the year-end, so there is little to weigh.

These gaps limit how far the reports can show the concentration and future cost of the AI build-out. None of them by itself shows a weakness in the business.

The report does not explain what drove the 84% rise in commercial remaining performance obligation to $678 billion, or how much of it relates to OpenAI or other large customers.^[1] It mentions extensions of the OpenAI partnership in October 2025 and April 2026, but the financial statement note describes only the October 2025 agreement, and the carrying value of the OpenAI investment is not shown separately.^[2][3] The cash flow statement shows deferred income taxes of $14,189 million for fiscal 2026 while the tax note shows deferred taxes of $14,424 million; the two match for the earlier years and the difference is not explained.^[4][5] The report gives no amount for the XBOX impairment and does not split capital spending between maintaining and expanding capacity.^[6] Nor does it show how the $329.1 billion of leases not yet started relate to the $443,506 million lease figure in the obligations table, or quantify the penalties and interest the IRS is seeking.^[7][8][9]

Last in the initial 20 because it gathers the open questions of the findings above it; marked Needs attention because several of those gaps concern the largest exposures, in findings 3, 4 and 8.