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October 30, 2025 • 4 min read
Microsoft has just released its latest quarterly report, giving us a fresh look under the hood of the tech giant. In this post, we'll dive into the numbers from its first quarter fiscal year 2026 report to see what's driving its performance and what it tells us about the company's strategy.
The headline figures are impressive: Microsoft pulled in $77.7 billion in revenue, an 18% increase from the same quarter last year. Operating income also saw a robust jump of 24% to $38.0 billion. However, the story gets more interesting when we look at the bottom line.
Microsoft's growth is overwhelmingly powered by its cloud offerings. The company breaks its business into three main segments:
When combined, the "Microsoft Cloud"—which spans across these segments—brought in a massive $49.1 billion for the quarter, up from $38.9 billion a year ago. It's clear that Microsoft's bet on the cloud is paying off handsomely.
The flow of revenue through the company's costs and expenses to its final profit is visualized in the chart below.
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While revenue and operating profit surged, the final net income tells a slightly different story. GAAP net income was $27.7 billion, a solid but less spectacular 12% increase. So, what's bridging the gap between a 24% rise in operating income and a 12% rise in net income?
The answer lies in a single line item: "Other expense, net." This account ballooned from an expense of $283 million last year to $3.7 billion this quarter. The filing provides a clear reason: a $4.1 billion net loss from its investment in OpenAI.
Microsoft uses the equity method to account for this investment, meaning it records a share of OpenAI's profits or losses on its own income statement. This significant non-cash loss highlights the immense cost of building and training cutting-edge AI models.
To provide a clearer picture of its core business performance, Microsoft also reported non-GAAP (adjusted) figures that exclude this impact. On that basis, adjusted net income was $30.8 billion, a 22% increase, which aligns more closely with its operational growth.
Microsoft isn't just investing in OpenAI through its partnership; it's also spending heavily on its own infrastructure. The cash flow statement reveals that additions to property and equipment—primarily datacenters—totaled $19.4 billion for the quarter. That's a huge increase from the $14.9 billion spent in the same period last year. This capital expenditure is essential for building the capacity needed to power Azure and the company's expanding AI services.
Meanwhile, the company continues to be a reliable source of returns for its shareholders. Based on the cash flow statement, Microsoft sent $11.8 billion back to shareholders during the quarter in the form of cash dividends paid ($6.2 billion) and share repurchases ($5.7 billion).
Microsoft's Q1 report paints a picture of a company firing on all cylinders. The cloud and AI are driving powerful top-line growth, and the company is showing good discipline in managing its operating costs.
However, the report also underscores the monumental cost of leading the AI revolution. The massive investments in infrastructure and the significant paper losses from the OpenAI partnership are impacting the bottom line. For investors, the story is clear: Microsoft is sacrificing some short-term profit for what it believes will be long-term dominance in the next era of computing.
Last updated: October 30, 2025