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 September 30, 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 October 23, 2025
Common Stock, $0.00000625 par value per share	7,432,377,655 shares

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2025

INDEX

				Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		a)	Income Statements for the Three Months Ended September 30, 2025 and 2024	3
		b)	Comprehensive Income Statements for the Three Months Ended September 30, 2025 and 2024	4
		c)	Balance Sheets as of September 30, 2025 and June 30, 2025	5
		d)	Cash Flows Statements for the Three Months Ended September 30, 2025 and 2024	6
		e)	Stockholders’ Equity Statements for the Three Months Ended September 30, 2025 and 2024	7
		f)	Notes to Financial Statements	8
		g)	Report of Independent Registered Public Accounting Firm	28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
	Item 4.	Controls and Procedures		42
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		43
	Item 1A.	Risk Factors		43
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		58
	Item 5.	Other Information		59
	Item 6.	Exhibits		60
SIGNATURE				61

2

PART I

Item 1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

(In millions, except per share amounts) (Unaudited)
Three Months Ended September 30,	2025			2024
Revenue:
Product	$	15,922		$	15,272
Service and other		61,751			50,313
Total revenue		77,673			65,585
Cost of revenue:
Product		2,922			3,294
Service and other		21,121			16,805
Total cost of revenue		24,043			20,099
Gross margin		53,630			45,486
Research and development		8,146			7,544
Sales and marketing		5,717			5,717
General and administrative		1,806			1,673
Operating income		37,961			30,552
Other expense, net		(3,660	)		(283	)
Income before income taxes		34,301			30,269
Provision for income taxes		6,554			5,602
Net income	$	27,747		$	24,667
Earnings per share:
Basic	$	3.73		$	3.32
Diluted	$	3.72		$	3.30
Weighted average shares outstanding:
Basic		7,433			7,433
Diluted		7,466			7,470

Refer to accompanying notes.

3

PART I

Item 1

COMPREHENSIVE INCOME STATEMENTS

(In millions) (Unaudited)
Three Months Ended September 30,	2025			2024
Net income	$	27,747		$	24,667
Other comprehensive income (loss), net of tax:
Net change related to derivatives		(3	)		(10	)
Net change related to investments		687			1,114
Translation adjustments and other		(98	)		304
Other comprehensive income		586			1,408
Comprehensive income	$	28,333		$	26,075

Refer to accompanying notes.

4

PART I

Item 1

BALANCE SHEETS

(In millions) (Unaudited)
	September 30, 2025			June 30, 2025
Assets
Current assets:
Cash and cash equivalents	$	28,849		$	30,242
Short-term investments		73,163			64,323
Total cash, cash equivalents, and short-term investments		102,012			94,565
Accounts receivable, net of allowance for doubtful accounts of $687 and $944		52,894			69,905
Inventories		1,130			938
Other current assets		33,030			25,723
Total current assets		189,066			191,131
Property and equipment, net of accumulated depreciation of $98,880 and $93,653		230,861			204,966
Operating lease right-of-use assets		24,791			24,823
Equity and other investments		11,465			15,405
Goodwill		119,497			119,509
Intangible assets, net		21,236			22,604
Other long-term assets		39,435			40,565
Total assets	$	636,351		$	619,003
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	32,580		$	27,724
Current portion of long-term debt		7,832			2,999
Accrued compensation		9,201			13,709
Short-term income taxes		3,655			7,211
Short-term unearned revenue		58,987			64,555
Other current liabilities		22,741			25,020
Total current liabilities		134,996			141,218
Long-term debt		35,376			40,152
Long-term income taxes		26,569			25,986
Long-term unearned revenue		2,546			2,710
Deferred income taxes		2,852			2,835
Operating lease liabilities		17,348			17,437
Other long-term liabilities		53,588			45,186
Total liabilities		273,275			275,524
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,434 and 7,434		110,964			109,095
Retained earnings		254,873			237,731
Accumulated other comprehensive loss		(2,761	)		(3,347	)
Total stockholders’ equity		363,076			343,479
Total liabilities and stockholders’ equity	$	636,351		$	619,003

Refer to accompanying notes.

5

PART I

Item 1

CASH FLOWS STATEMENTS

(In millions) (Unaudited)
Three Months Ended September 30,	2025			2024
Operations
Net income	$	27,747		$	24,667
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		13,061			7,383
Stock-based compensation expense		2,983			2,832
Net recognized gains on investments and derivatives		(1,007	)		(125	)
Deferred income taxes		2,491			(1,433	)
Changes in operating assets and liabilities:
Accounts receivable		16,490			14,037
Inventories		(192	)		(373	)
Other current assets		(1,162	)		(82	)
Other long-term assets		(394	)		(1,761	)
Accounts payable		(614	)		(916	)
Unearned revenue		(5,418	)		(5,553	)
Income taxes		(2,944	)		1,016
Other current liabilities		(5,507	)		(5,479	)
Other long-term liabilities		(477	)		(33	)
Net cash from operations		45,057			34,180
Financing
Repayments of debt, maturities of 90 days or less		0			(5,746	)
Repayments of debt		0			(966	)
Common stock issued		689			706
Common stock repurchased		(5,650	)		(4,107	)
Common stock cash dividends paid		(6,169	)		(5,574	)
Other, net		(669	)		(889	)
Net cash used in financing		(11,799	)		(16,576	)
Investing
Additions to property and equipment		(19,394	)		(14,923	)
Acquisition of companies, net of cash acquired and divestitures, and purchases of intangible and other assets		(578	)		(1,849	)
Purchases of investments		(17,671	)		(1,620	)
Maturities of investments		6,031			2,136
Sales of investments		3,262			1,968
Other, net		(6,209	)		(913	)
Net cash used in investing		(34,559	)		(15,201	)
Effect of foreign exchange rates on cash and cash equivalents		(92	)		122
Net change in cash and cash equivalents		(1,393	)		2,525
Cash and cash equivalents, beginning of period		30,242			18,315
Cash and cash equivalents, end of period	$	28,849		$	20,840

Refer to accompanying notes.

6

PART I

Item 1

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts) (Unaudited)
Three Months Ended September 30,	2025			2024
Common stock and paid-in capital
Balance, beginning of period	$	109,095		$	100,923
Common stock issued		689			706
Common stock repurchased		(1,801	)		(1,485	)
Stock-based compensation expense		2,983			2,832
Other, net		(2	)		0
Balance, end of period		110,964			102,976
Retained earnings
Balance, beginning of period		237,731			173,144
Net income		27,747			24,667
Common stock cash dividends		(6,764	)		(6,171	)
Common stock repurchased		(3,841	)		(2,711	)
Balance, end of period		254,873			188,929
Accumulated other comprehensive loss
Balance, beginning of period		(3,347	)		(5,590	)
Other comprehensive income		586			1,408
Balance, end of period		(2,761	)		(4,182	)
Total stockholders’ equity	$	363,076		$	287,723
Cash dividends declared per common share	$	0.91		$	0.83

Refer to accompanying notes.

7

PART I

Item 1

NOTES TO FINANCIAL 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.

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.

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.

8

PART I

Item 1

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). 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 value are recorded in other income (expense), net.

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 an investment in OpenAI Global, LLC (“OpenAI”) and have made total funding commitments of $13 billion, of which $11.6 billion has been funded as of September 30, 2025. The investment is accounted for under the equity method of accounting, with our share of OpenAI’s income or loss recognized in other income (expense), net.

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.

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.

9

PART I

Item 1

•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 September 30, 2025 and June 30, 2025, long-term accounts receivable, net of allowance for doubtful accounts, was $5.0 billion and $5.2 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

As of September 30, 2025 and June 30, 2025, other receivables related to activities to facilitate the purchase of server components were $14.4 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 September 30, 2025 and June 30, 2025, our financing receivables, net were $3.9 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.

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.

10

PART I

Item 1

The components of basic and diluted EPS were as follows:

(In millions, except per share amounts)
Three Months Ended September 30,	2025		2024
Net income available for common shareholders (A)	$	27,747	$	24,667
Weighted average outstanding shares of common stock (B)		7,433		7,433
Dilutive effect of stock-based awards		33		37
Common stock and common stock equivalents (C)		7,466		7,470
Earnings Per Share
Basic (A/B)	$	3.73	$	3.32
Diluted (A/C)	$	3.72	$	3.30

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

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

(In millions)
Three Months Ended September 30,	2025			2024
Interest and dividends income	$	976		$	681
Interest expense		(698	)		(582	)
Net recognized gains (losses) on investments		(572	)		463
Net gains (losses) on derivatives		1,579			(338	)
Net gains (losses) on foreign currency remeasurements		(22	)		176
Other, net		(4,923	)		(683	)
Total	$	(3,660	)	$	(283	)

For the three months ended September 30, 2025 and 2024, other income (expense), net included $4.1 billion and $688 million, respectively, of net losses from investments in OpenAI, primarily net recognized losses on our equity method investment reflected in other, net.

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)
Three Months Ended September 30,	2025			2024
Realized gains from sales of available-for-sale securities	$	16		$	8
Realized losses from sales of available-for-sale securities		(10	)		(15	)
Impairments and allowance for credit losses		4			12
Total	$	10		$	5

Net recognized gains (losses) on equity investments were as follows:

(In millions)
Three Months Ended September 30,	2025			2024
Net realized gains on investments sold	$	71		$	65
Net unrealized gains (losses) on investments still held		(635	)		412
Impairments of investments		(18	)		(19	)
Total	$	(582	)	$	458

11

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
September 30, 2025
Changes in Fair Value Recorded in Other Comprehensive Income
Commercial paper	Level 2	$	9,044	$	0	$	0		$	9,044	$	8,597	$	447	$	0
Certificates of deposit	Level 2		4,478		0		0			4,478		4,434		44		0
U.S. government securities	Level 1		54,749		119		(1,238	)		53,630		1,143		52,487		0
U.S. agency securities	Level 2		5,584		0		0			5,584		2,100		3,484		0
Foreign government bonds	Level 2		392		13		(6	)		399		0		399		0
Mortgage- and asset-backed securities	Level 2		3,587		20		(23	)		3,584		0		3,584		0
Corporate notes and bonds	Level 2		12,246		174		(70	)		12,350		0		12,350		0
Corporate notes and bonds	Level 3		2,055		568		0			2,623		0		113		2,510
Municipal securities	Level 2		162		1		(5	)		158		0		158		0
Municipal securities	Level 3		104		0		(14	)		90		0		90		0
Total debt investments		$	92,401	$	895	$	(1,356	)	$	91,940	$	16,274	$	73,156	$	2,510
Changes in Fair Value Recorded in Net Income
Equity investments	Level 1								$	4,111	$	1,209	$	0	$	2,902
Equity investments	Other									4,871		0		0		4,871
Total equity investments									$	8,982	$	1,209	$	0	$	7,773
Cash									$	11,366	$	11,366	$	0	$	0
Derivatives, net (a)										1,189		0		7		1,182
Total									$	113,477	$	28,849	$	73,163	$	11,465

12

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 both September 30, 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 $2.9 billion. As of September 30, 2025 and June 30, 2025, equity investments measured using the equity method were $1.8 billion and $6.0 billion, respectively.

13

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
September 30, 2025
U.S. government and agency securities	$	312	$	(52	)	$	32,625	$	(1,186	)	$	32,937	$	(1,238	)
Foreign government bonds		45		(2	)		105		(4	)		150		(6	)
Mortgage- and asset-backed securities		0		0			264		(23	)		264		(23	)
Corporate notes and bonds		285		(1	)		2,718		(69	)		3,003		(70	)
Municipal securities		0		0			167		(19	)		167		(19	)
Total	$	642	$	(55	)	$	35,879	$	(1,301	)	$	36,521	$	(1,356	)

	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 September 30, 2025:

(In millions)	Adjusted Cost Basis		Estimated Fair Value
September 30, 2025
Due in one year or less	$	37,304	$	37,200
Due after one year through five years		48,228		47,466
Due after five years through 10 years		5,397		5,877
Due after 10 years		1,472		1,397
Total	$	92,401	$	91,940

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.

14

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 September 30, 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)	September 30, 2025		June 30, 2025
Designated as Hedging Instruments
Foreign exchange contracts purchased	$	1,492	$	1,492
Interest rate contracts purchased		1,167		1,150
Not Designated as Hedging Instruments
Foreign exchange contracts purchased		11,810		15,214
Foreign exchange contracts sold		33,053		43,307
Equity contracts purchased		5,766		5,434
Equity contracts sold		2,189		2,189
Other contracts purchased		2,668		2,769
Other contracts sold		836		1,242

15

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
	September 30, 2025						June 30, 2025
Designated as Hedging Instruments
Foreign exchange contracts	$	83		$	(48	)	$	89		$	(44	)
Interest rate contracts		6			0			15			0
Not Designated as Hedging Instruments
Foreign exchange contracts		202			(397	)		248			(809	)
Equity contracts		1,274			(353	)		385			(983	)
Other contracts		10			(6	)		21			(1	)
Gross amounts of derivatives		1,575			(804	)		758			(1,837	)
Gross amounts of derivatives offset in the balance sheets		(247	)		248			(258	)		260
Cash collateral received		0			(67	)		0			(99	)
Net amounts of derivatives	$	1,328		$	(623	)	$	500		$	(1,676	)
Reported as
Short-term investments	$	7		$	0		$	10		$	0
Other current assets		132			0			201			0
Equity and other investments		1,182			0			272			0
Other long-term assets		7			0			17			0
Other current liabilities		0			(570	)		0			(1,639	)
Other long-term liabilities		0			(53	)		0			(37	)
Total	$	1,328		$	(623	)	$	500		$	(1,676	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $376 million and $802 million, respectively, as of September 30, 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
September 30, 2025
Derivative assets	$	0	$	388		$	1,187		$	1,575
Derivative liabilities		0		(804	)		0			(804	)
June 30, 2025
Derivative assets		1		474			283			758
Derivative liabilities		0		(1,832	)		(5	)		(1,837	)

16

PART I

Item 1

Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

(In millions)
Three Months Ended September 30,		2025			2024
Designated as Fair Value Hedging Instruments
Interest rate contracts
Derivatives	$	(1	)	$	20
Hedged items		(8	)		(32	)
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassified from accumulated other comprehensive loss		(5	)		49
Not Designated as Hedging Instruments
Foreign exchange contracts		381			(383	)
Equity contracts		1,579			(348	)
Other contracts		0			24

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)
Three Months Ended September 30,	2025			2024
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in effectiveness assessment	$	(7	)	$	29

NOTE 6 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)
	September 30, 2025			June 30, 2025
Land	$	9,450		$	9,338
Buildings and improvements		152,433			137,921
Leasehold improvements		13,610			12,117
Servers, network equipment, and software		147,701			132,836
Furniture and equipment		6,547			6,407
Total, at cost		329,741			298,619
Accumulated depreciation		(98,880	)		(93,653	)
Total, net	$	230,861		$	204,966

Depreciation expense was $7.1 billion and $4.7 billion for the three months ended September 30, 2025 and 2024, respectively.

As of September 30, 2025 and June 30, 2025, purchases of property and equipment remaining in accounts payable were $18.6 billion and $6.9 billion, respectively.

17

PART I

Item 1

NOTE 7 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)	June 30, 2025		Acquisitions		Other			September 30, 2025
Productivity and Business Processes	$	31,457	$	0	$	1		$	31,458
Intelligent Cloud		25,689		0		(7	)		25,682
More Personal Computing		62,363		0		(6	)		62,357
Total	$	119,509	$	0	$	(12	)	$	119,497

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
	September 30, 2025							June 30, 2025
Marketing-related	$	16,502	$	(4,101	)	$	12,401	$	16,502	$	(3,901	)	$	12,601
Technology-based		22,642		(16,056	)		6,586		22,560		(14,959	)		7,601
Customer-related		4,278		(2,204	)		2,074		4,278		(2,050	)		2,228
Contract-based		230		(55	)		175		217		(43	)		174
Total	$	43,652	$	(22,416	)	$	21,236	$	43,557	$	(20,953	)	$	22,604

Intangible assets amortization expense was $1.5 billion and $1.4 billion for the three months ended September 30, 2025 and 2024, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of September 30, 2025:

(In millions)
Year Ending June 30,
2026 (excluding the three months ended September 30, 2025)	$	3,186
2027		2,932
2028		2,038
2029		1,853
2030		1,385
Thereafter		9,842
Total	$	21,236

18

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			September 30, 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%		2,702			2,700
2015 issuance of $23.8 billion		2025	–	2055		3.13%	–	4.75%	3.18%	–	4.78%		7,555			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													49,208			49,206
Unamortized discount and issuance costs													(1,136	)		(1,155	)
Hedge fair value adjustments (a)													(28	)		(36	)
Premium on debt exchange													(4,836	)		(4,864	)
Total debt													43,208			43,151
Current portion of long-term debt													(7,832	)		(2,999	)
Long-term debt												$	35,376		$	40,152

(a)Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of September 30, 2025 and June 30, 2025, the estimated fair value of long-term debt, including the current portion, was $40.9 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 September 30, 2025:

(In millions)
Year Ending June 30,
2026 (excluding the three months ended September 30, 2025)	$	3,000
2027		9,250
2028		0
2029		2,056
2030		0
Thereafter		34,902
Total	$	49,208

NOTE 10 — INCOME TAXES

Effective Tax Rate

Our effective tax rate was 19% for both the three months ended September 30, 2025 and 2024. Our effective tax rate for the three months ended September 30, 2025 was relatively unchanged compared to prior year as U.S. tax law changes from the One Big Beautiful Bill Act enacted on July 4, 2025 were offset by changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.

19

PART I

Item 1

Our effective tax rate was lower than the U.S. federal statutory rate for the three months ended September 30, 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 September 30, 2025 and June 30, 2025, unrecognized tax benefits and other income tax liabilities were $28.0 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 September 30, 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 2020 and thereafter.

NOTE 11 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)
	September 30, 2025		June 30, 2025
Productivity and Business Processes	$	46,357	$	50,567
Intelligent Cloud		12,659		14,022
More Personal Computing		2,517		2,676
Total	$	61,533	$	67,265

Changes in unearned revenue were as follows:

(In millions)
Three Months Ended September 30, 2025
Balance, beginning of period	$	67,265
Deferral of revenue		44,297
Recognition of unearned revenue		(50,029	)
Balance, end of period	$	61,533

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $398 billion as of September 30, 2025, of which $392 billion is related to the commercial portion of revenue. We expect to recognize approximately 40% of our total company 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.

20

PART I

Item 1

The components of lease expense were as follows:

(In millions)
Three Months Ended September 30,	2025		2024
Operating lease cost	$	1,656	$	1,161
Finance lease cost:
Amortization of right-of-use assets	$	1,173	$	696
Interest on lease liabilities		546		275
Total finance lease cost	$	1,719	$	971

Supplemental cash flow information related to leases was as follows:

(In millions)
Three Months Ended September 30,		2025		2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,656	$	1,207
Operating cash flows from finance leases		546		275
Financing cash flows from finance leases		639		802
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		1,417		1,892
Finance leases		9,147		4,332

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)
	September 30, 2025			June 30, 2025
Operating Leases
Operating lease right-of-use assets	$	24,791		$	24,823
Other current liabilities	$	5,385		$	5,424
Operating lease liabilities		17,348			17,437
Total operating lease liabilities	$	22,733		$	22,861
Finance Leases
Property and equipment, at cost	$	66,435		$	53,876
Accumulated depreciation		(11,330	)		(9,861	)
Property and equipment, net	$	55,105		$	44,015
Other current liabilities	$	3,435		$	3,172
Other long-term liabilities		50,999			43,000
Total finance lease liabilities	$	54,434		$	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%

21

PART I

Item 1

The following table outlines maturities of our lease liabilities as of September 30, 2025:

(In millions)
Year Ending June 30,	Operating Leases			Finance Leases
2026 (excluding the three months ended September 30, 2025)	$	4,627		$	4,218
2027		5,506			5,862
2028		3,770			5,909
2029		2,641			5,259
2030		2,162			5,136
Thereafter		6,586			46,450
Total lease payments		25,292			72,834
Less imputed interest		(2,559	)		(18,400	)
Total	$	22,733		$	54,434

As of September 30, 2025, we had additional leases, primarily for datacenters, that had not yet commenced of $106.2 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, and the next hearing is scheduled for December 2025.

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 September 30, 2025, we accrued aggregate legal liabilities of $530 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $300 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 September 30, 2025, $53.4 billion remained of this $60.0 billion share repurchase program.

22

PART I

Item 1

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

All repurchases were made using cash resources. Shares repurchased during the first quarter of fiscal year 2026 were under the share repurchase program approved on September 16, 2024. Shares repurchased during the first quarter of 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 $1.7 billion and $1.3 billion for the three months ended September 30, 2025 and 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	$	6,765
Fiscal Year 2025
September 16, 2024	November 21, 2024	December 12, 2024	$	0.83	$	6,170

The dividend declared on September 15, 2025 was included in other current liabilities as of September 30, 2025.

23

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 September 30,		2025			2024
Derivatives
Balance, beginning of period	$	(8	)	$	(3	)
Unrealized gains (losses), net of tax of $(2) and $7		(7	)		29
Reclassification adjustments for (gains) losses included in other income (expense), net		5			(49	)
Tax expense (benefit) included in provision for income taxes		(1	)		10
Amounts reclassified from accumulated other comprehensive loss		4			(39	)
Net change related to derivatives, net of tax of $(1) and $(3)		(3	)		(10	)
Balance, end of period	$	(11	)	$	(13	)
Investments
Balance, beginning of period	$	(1,051	)	$	(2,625	)
Unrealized gains, net of tax of $185 and $297		695			1,118
Reclassification adjustments for gains included in other income (expense), net		(10	)		(5	)
Tax expense included in provision for income taxes		2			1
Amounts reclassified from accumulated other comprehensive loss		(8	)		(4	)
Net change related to investments, net of tax of $183 and $296		687			1,114
Balance, end of period	$	(364	)	$	(1,511	)
Translation Adjustments and Other
Balance, beginning of period	$	(2,288	)	$	(2,962	)
Translation adjustments and other, net of tax of $0 and $0		(98	)		304
Balance, end of period	$	(2,386	)	$	(2,658	)
Accumulated other comprehensive loss, end of period	$	(2,761	)	$	(4,182	)

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.

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.

24

PART I

Item 1

•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.

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.

25

PART I

Item 1

Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:

(In millions)
Three Months Ended September 30,	2025		2024
Productivity and Business Processes
Revenue	$	33,020	$	28,317
Cost of revenue		5,721		5,294
Operating expenses		6,892		6,507
Operating income	$	20,407	$	16,516
Intelligent Cloud
Revenue	$	30,897	$	24,092
Cost of revenue		12,314		8,614
Operating expenses		5,192		4,975
Operating income	$	13,391	$	10,503
More Personal Computing
Revenue	$	13,756	$	13,176
Cost of revenue		6,008		6,191
Operating expenses		3,585		3,452
Operating income	$	4,163	$	3,533
Total
Revenue	$	77,673	$	65,585
Cost of revenue		24,043		20,099
Operating expenses		15,669		14,934
Operating income	$	37,961	$	30,552

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the three months ended September 30, 2025 or 2024. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)
Three Months Ended September 30,	2025		2024
United States (a)	$	40,077	$	33,913
Other countries		37,596		31,672
Total	$	77,673	$	65,585

(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.

26

PART I

Item 1

Revenue, classified by significant product and service offerings, was as follows:

(In millions)
Three Months Ended September 30,	2025		2024
Server products and cloud services	$	28,872	$	22,155
Microsoft 365 Commercial products and cloud services		23,966		20,449
Gaming		5,508		5,621
LinkedIn		4,714		4,292
Windows and Devices		4,551		4,329
Search and news advertising		3,697		3,225
Microsoft 365 Consumer products and cloud services		2,204		1,727
Dynamics products and cloud services		2,136		1,849
Enterprise and partner services		2,022		1,928
Other		3		10
Total	$	77,673	$	65,585

Our Microsoft Cloud revenue, which includes Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365, was $49.1 billion and $38.9 billion for the three months ended September 30, 2025 and 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.

NOTE 17 — SUBSEQUENT EVENT

On October 28, 2025, we signed a new definitive agreement with OpenAI that extends our partnership and continues to build on our shared vision to advance artificial intelligence responsibly and make its benefits broadly accessible. Additionally, OpenAI has formed a public benefit corporation (“PBC”) and completed a recapitalization. As a result of the recapitalization, Microsoft holds approximately 27 percent in the PBC on an as-converted diluted basis. Under the new agreement, OpenAI has contracted to purchase an incremental $250 billion of Azure services, and Microsoft will no longer have a right of first refusal to be OpenAI's compute provider.

We will continue to account for our $13 billion of total funding commitments to OpenAI as an investment under the equity method of accounting. Under the equity method of accounting, the impact of changes in our proportionate ownership will be recognized as a gain or loss in other income (expense), net. See Note 1 – Accounting Policies, Note 3 – Other Income (Expense), Net, and Note 4 – Investments for further details on our equity method investments and other income (expense), net.

27

PART I

Item 1

REPORT OF INDEPENDENT REGISTERED 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 September 30, 2025, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for the three-month periods ended September 30, 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/ DELOITTE & TOUCHE LLP

Seattle, Washington

October 29, 2025

28

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 first quarter of fiscal year 2026 compared with the first quarter of fiscal year 2025 included:

•Microsoft Cloud revenue increased 26% to $49.1 billion.

•Commercial remaining performance obligation increased 51% to $392 billion.

•Microsoft 365 Commercial cloud revenue increased 17%.

•Microsoft 365 Consumer cloud revenue increased 26%.

•LinkedIn revenue increased 10%.

•Dynamics 365 revenue increased 18%.

•Azure and other cloud services revenue increased 40%.

•Windows OEM and Devices revenue increased 6%.

•Xbox content and services revenue increased 1%.

•Search and news advertising revenue excluding traffic acquisition costs increased 16%.

29

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.

Microsoft and OpenAI Global, LLC (“OpenAI”) maintain a long-term strategic partnership originally established in 2019. 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 did not have a material impact on reported revenue and expenses from our international operations in the first quarter of fiscal year 2026.

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.

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.

30

PART I

Item 2

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

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

31

PART I

Item 2

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 September 30,			Percentage Change
		2025		2024
Revenue	$	77,673	$	65,585		18%
Gross margin		53,630		45,486		18%
Operating income		37,961		30,552		24%
Net income		27,747		24,667		12%
Diluted earnings per share		3.72		3.30		13%
Adjusted net income (non-GAAP)		30,833		25,190		22%
Adjusted diluted earnings per share (non-GAAP)		4.13		3.37		23%

Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net 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 September 30, 2025 Compared with Three Months Ended September 30, 2024

Revenue increased $12.1 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 Windows OEM and Search and news advertising, offset in part by declines in our hardware businesses, including Devices and Xbox hardware.

Cost of revenue increased $3.9 billion or 20% driven by growth in Microsoft Cloud.

Gross margin increased $8.1 billion or 18% with growth across each of our segments.

•Gross margin percentage decreased slightly driven by scaling our AI infrastructure and growing usage of AI product features, offset in part by efficiency gains across the Microsoft Cloud.

•Microsoft Cloud gross margin percentage decreased to 68% driven by scaling our AI infrastructure and growing usage of AI product features, offset in part by efficiency gains in Azure and Microsoft 365 Commercial cloud.

Operating expenses increased $735 million or 5% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development across the portfolio.

Operating income increased $7.4 billion or 24% with growth across each of our segments.

Gross margin and operating income both included a favorable foreign currency impact of 2%.

32

PART I

Item 2

Current 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 $3.1 billion and $0.41, 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 $523 million and $0.07, respectively.

SEGMENT RESULTS OF OPERATIONS

(In millions, except percentages)	Three Months Ended September 30,				Percentage Change
		2025		2024
Productivity and Business Processes
Revenue	$	33,020	$	28,317		17%
Cost of revenue		5,721		5,294		8%
Operating expenses		6,892		6,507		6%
Operating income	$	20,407	$	16,516		24%
Intelligent Cloud
Revenue	$	30,897	$	24,092		28%
Cost of revenue		12,314		8,614		43%
Operating expenses		5,192		4,975		4%
Operating income	$	13,391	$	10,503		27%
More Personal Computing
Revenue	$	13,756	$	13,176		4%
Cost of revenue		6,008		6,191		(3)%
Operating expenses		3,585		3,452		4%
Operating income	$	4,163	$	3,533		18%
Total
Revenue	$	77,673	$	65,585		18%
Cost of revenue		24,043		20,099		20%
Operating expenses		15,669		14,934		5%
Operating income	$	37,961	$	30,552		24%

Reportable Segments

Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 2024

Productivity and Business Processes

Revenue increased $4.7 billion or 17%.

•Microsoft 365 Commercial products and cloud services revenue increased $3.5 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, as well as benefit from in-period revenue recognition. Microsoft 365 Commercial seats grew 6% driven by small and medium businesses and frontline worker offerings. Microsoft 365 Commercial products revenue grew 17% driven by an increase in Office 2024 transactional purchasing as well as growth in the Windows Commercial on-premises components of Microsoft 365 suite sales.

•Microsoft 365 Consumer products and cloud services revenue increased $477 million or 28%. Microsoft 365 Consumer cloud revenue grew 26% driven by growth in revenue per user and Microsoft 365 Consumer subscriber growth of 7%.

•LinkedIn revenue increased $422 million or 10% driven by growth in Marketing Solutions.

•Dynamics products and cloud services revenue increased $287 million or 16% driven by growth in Dynamics 365. Dynamics 365 revenue grew 18% with growth across all workloads.

Operating income increased $3.9 billion or 24%.

•Cost of revenue increased $427 million or 8% driven by growth in Microsoft 365 Commercial cloud.

33

PART I

Item 2

•Gross margin increased $4.3 billion or 19% 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 scaling our AI infrastructure and growing usage of AI product features.

•Operating expenses increased $385 million or 6% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development that benefits the entire portfolio.

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

Intelligent Cloud

Revenue increased $6.8 billion or 28%.

•Server products and cloud services revenue increased $6.7 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 1% driven by an increase in transactional purchasing of Windows Server 2025.

•Enterprise and partner services revenue increased $94 million or 5% driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions.

Operating income increased $2.9 billion or 27%.

•Cost of revenue increased $3.7 billion or 43% driven by growth in Azure.

•Gross margin increased $3.1 billion or 20% driven by growth in Azure. Gross margin percentage decreased driven by the impact of scaling our AI infrastructure, offset in part by efficiency gains in Azure.

•Operating expenses increased $217 million or 4% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development that benefits the entire portfolio.

More Personal Computing

Revenue increased $580 million or 4%.

•Windows and Devices revenue increased $222 million or 5%. Windows OEM and Devices revenue increased 6% driven by Windows OEM growth of 18% with demand ahead of Windows 10 end of support and inventory levels that remained elevated, offset in part by a decline in Devices.

•Gaming revenue decreased $113 million or 2% driven by a decline in Xbox hardware, offset in part by growth in Xbox content and services. Xbox hardware revenue decreased 29% driven by lower volume of consoles sold. Xbox content and services revenue increased 1% on a strong prior year comparable with growth in Xbox Game Pass and third-party content, offset in part by a decline in first-party content.

•Search and news advertising revenue increased $472 million or 15%. Search and news advertising revenue excluding traffic acquisition costs increased 16% driven by higher search volume and continued benefit from third-party partnerships.

Operating income increased $630 million or 18%.

•Cost of revenue decreased $183 million or 3% driven by lower hardware sales, offset in part by growth in Search and news advertising.

•Gross margin increased $763 million or 11% 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 $133 million or 4% driven by investments in AI talent and compute capacity to support product development that benefits the entire portfolio.

Operating income included a favorable foreign currency impact of 2%.

34

PART I

Item 2

OPERATING EXPENSES

Research and Development

(In millions, except percentages)	Three Months Ended September 30,				Percentage Change
	2025		2024
Research and development	$	8,146	$	7,544		8%
As a percent of revenue		10%		12%		(2)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 September 30, 2025 Compared with Three Months Ended September 30, 2024

Research and development expenses increased $602 million or 8% driven by investments in cloud and AI engineering, including compute capacity and AI talent to support product development across the portfolio.

Sales and Marketing

(In millions, except percentages)	Three Months Ended September 30,				Percentage Change
	2025		2024
Sales and marketing	$	5,717	$	5,717		0%
As a percent of revenue		7%		9%		(2)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 September 30, 2025 Compared with Three Months Ended September 30, 2024

Sales and marketing expenses were relatively unchanged.

General and Administrative

(In millions, except percentages)	Three Months Ended September 30,				Percentage Change
	2025		2024
General and administrative	$	1,806	$	1,673		8%
As a percent of revenue		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 September 30, 2025 Compared with Three Months Ended September 30, 2024

General and administrative expenses increased $133 million or 8% driven by higher legal expenses.

35

PART I

Item 2

OTHER INCOME (EXPENSE), NET

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

(In millions)
Three Months Ended September 30,	2025			2024
Interest and dividends income	$	976		$	681
Interest expense		(698	)		(582	)
Net recognized gains (losses) on investments		(572	)		463
Net gains (losses) on derivatives		1,579			(338	)
Net gains (losses) on foreign currency remeasurements		(22	)		176
Other, net		(4,923	)		(683	)
Total	$	(3,660	)	$	(283	)

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.

For the three months ended September 30, 2025 and 2024, other income (expense), net included $4.1 billion and $688 million, respectively, of net losses from investments in OpenAI, primarily net recognized losses on our equity method investment.

Three Months Ended September 30, 2025 Compared with Three Months Ended September 30, 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 increased primarily due to 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 losses on equity method investments, including OpenAI.

INCOME TAXES

Effective Tax Rate

Our effective tax rate was 19% for both the three months ended September 30, 2025 and 2024. Our effective tax rate for the three months ended September 30, 2025 was relatively unchanged compared to prior year as U.S. tax law changes from the One Big Beautiful Bill Act enacted on July 4, 2025 were offset by 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 months ended September 30, 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 September 30, 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 2020 and thereafter.

36

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 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 September 30,						Percentage Change
		2025			2024
Other income (expense), net	$	(3,660	)	$	(283	)		(1,193)%
Net losses from investments in OpenAI		4,061			688			490%
Adjusted other income (expense), net (non-GAAP)	$	401		$	405			(1)%
Net income	$	27,747		$	24,667			12%
Net losses from investments in OpenAI, net of tax		3,086			523			490%
Adjusted net income (non-GAAP)	$	30,833		$	25,190			22%
Diluted earnings per share	$	3.72		$	3.30			13%
Net losses from investments in OpenAI		0.41			0.07			486%
Adjusted diluted earnings per share (non-GAAP)	$	4.13		$	3.37			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 $102.0 billion and $94.6 billion as of September 30, 2025 and June 30, 2025, respectively. Equity and other investments were $11.5 billion and $15.4 billion as of September 30, 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.

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.

37

PART I

Item 2

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 $10.9 billion to $45.1 billion for the three months ended September 30, 2025, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and cash used to pay income taxes. Cash used in financing decreased $4.8 billion to $11.8 billion for the three months ended September 30, 2025, primarily due to a $6.7 billion decrease in cash used for repayments of debt, offset in part by a $1.5 billion increase in common stock repurchases. Cash used in investing increased $19.4 billion to $34.6 billion for the three months ended September 30, 2025, primarily due to a $10.9 billion increase in cash used in net investment purchases, sales, and maturities, a $5.3 billion increase in other investing to facilitate the purchase of components, and a $4.5 billion increase in additions to property and equipment.

Debt Proceeds

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

Unearned Revenue

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

The following table outlines the expected future recognition of unearned revenue as of September 30, 2025:

(In millions)
Three Months Ending
December 31, 2025	$	26,848
March 31, 2026		19,044
June 30, 2026		10,770
September 30, 2026		2,325
Thereafter		2,546
Total	$	61,533

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

38

PART I

Item 2

Material Cash Requirements and Other Obligations

Share Repurchases

For the three months ended September 30, 2025 and 2024, we repurchased 8 million shares and 7 million shares of our common stock for $4.0 billion and $2.8 billion, respectively, through our share repurchase program. All repurchases were made using cash resources. As of September 30, 2025, $53.4 billion remained of our $60 billion share repurchase program. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Dividends

For the three months ended September 30, 2025 and 2024, our Board of Directors declared dividends totaling $6.8 billion and $6.2 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 14 – Stockholders’ Equity of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q).

Other Planned Uses of Capital

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

RECENT ACCOUNTING GUIDANCE

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

CRITICAL ACCOUNTING ESTIMATES

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

Revenue Recognition

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

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

39

PART I

Item 2

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

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

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

Impairment of Investment Securities

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

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

Goodwill

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

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

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.

40

PART I

Item 2

Research and Development Costs

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

Legal and Other Contingencies

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

Income Taxes

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

41

PART I

Item 3, 4

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISKS

We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements.

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 positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices to facilitate portfolio diversification.

Equity

Securities held in our equity investments portfolio are subject to price risk.

SENSITIVITY ANALYSIS

The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:

(In millions)
Risk Categories	Hypothetical Change	September 30, 2025			Impact
Foreign currency – Revenue	10% decrease in foreign exchange rates	$	(12,305	)	Earnings
Foreign currency – Investments	10% decrease in foreign exchange rates		(19	)	Fair Value
Interest rate	100 basis point increase in U.S. treasury interest rates		(1,569	)	Fair Value
Credit	100 basis point increase in credit spreads		(523	)	Fair Value
Equity	10% decrease in equity market prices		(906	)	Earnings

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42

PART II

Item 1, 1A

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 13 – Contingencies of the Notes to Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, operations, financial condition, results of operations, liquidity, and the trading price of our common stock.

STRATEGIC AND COMPETITIVE RISKS

We face intense competition across all markets for our products and services, which could adversely affect our results of operations.

Competition in the technology sector