Brief
Demo view — informational only.
Executive Takeaway
Microsoft's net income and diluted EPS saw significant increases due to net gains from investments in OpenAI, amounting to $7.6 billion and $1.02, respectively. [E2]
- The company reported a substantial increase in cash from operations, totaling $80.8 billion for the six months ended December 31, 2025. [E5]
- Microsoft disclosed activities related to sanctioned Taiwanese entities, which have since been terminated, with no revenue generated from these activities. [E4]
What Happened
Risks / Uncertainties
- Microsoft is currently under IRS audit for prior tax years, facing potential additional tax payments of $28.9 billion, which could adversely affect future results. [E10]
Key Facts
| Ticker | MSFT |
| Form | 10-Q |
| Filed | 2026-01-28 |
| Impact | High (88/100) |
| Accession No. | 0001193125-26-027207 |
| CIK | 0000789019 |
| Cash from Operations | $80.8 billion |
| Net Income Increase | $7.6 billion |
| Diluted EPS Increase | $1.02 |
Evidence
Show evidence notes
E2
Highlights the financial impact of OpenAI investments on Microsoft's earnings.
E5
Demonstrates the company's strong operational cash flow.
E4
Shows compliance with regulatory requirements regarding sanctioned entities.
Show evidence blocks (E1..)
Adjusted other income (expense), net, adjusted net income, and adjusted diluted EPS are non-GAAP financial measures which exclude net (gains) losses from investments in OpenAI. We believe these non-GAAP measures aid investors by providing additional insight into our financial performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
Current year net income and diluted EPS were positively impacted by net gains from investments in OpenAI, which resulted in an increase in net income and diluted EPS of $7.6 billion and $1.02, respectively. Prior year net income and diluted EPS were negatively impacted by net losses from investments in OpenAI, which resulted in a decrease in net income and diluted EPS of $939 million and $0.12, respectively.
Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures. These non-GAAP financial measures exclude net gains and losses from investments in OpenAI. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.
Pursuant to Section 13(r) of the Securities Exchange Act of 1934, we are required to disclose knowing transactions or dealings involving specific sanctions programs administered by the U.S. Office of Foreign Assets Control (“OFAC”). We disclose the following activities in connection with two Taiwanese entities sanctioned under the Weapons of Mass Destruction Proliferators Regulations. During the quarter ended December 31, 2025, our affiliate in the Asia-Pacific region communicated with these entities about suspension of services following their OFAC designations and allowed these entities to retrieve customer data from our servers in the Asia-Pacific region. No revenue or profit was generated by these activities. We have already terminated these reported activities as of the date of this filing.
Cash from operations increased $24.3 billion to $80.8 billion for the six months ended December 31, 2025, primarily due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers. Cash used in financing increased $1.6 billion to $29.4 billion for the six months ended December 31, 2025, primarily due to a $4.0 billion increase in common stock repurchases, offset in part by a $3.7 billion decrease in cash used for repayments of debt. Cash used in investing increased $28.0 billion to $57.3 billion for the six months ended December 31, 2025, primarily due to an $18.5 billion increase in additions to property and equipment, a $5.9 billion increase in other investing to facilitate the purchase of components, and a $5.7 billion increase in cash used in net investment purchases, sales, and maturities.
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.
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 r
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts expected to be invoiced and recognized as revenue in future periods, was $ 631 billion as of December 31, 2025. Estimating revenue that will be allocated to remaining performance obligations can involve significant judgments, including identifying and assessing variable consideration and potential renegotiation of commitments. We consider factors such as the nature of the terms and duration of the contract across our portfolio of contracts. Revenue allocated to remaining performance obligations related to the commercial portion of revenue was $ 625 billion as of December 31, 2025, with a weighted average duration of approximately 2.5 years. We expect to recognize approximately 25 % of both our total company remaining performance obligation revenue and commercial remaining performance obligation revenue over the next 12 months and the remainder thereafter.
We have a long-term strategic partnership with OpenAI. In October 2025, we signed a new definitive agreement with OpenAI that extends this partnership. Additionally, OpenAI formed a public benefit corporation and completed a recapitalization (“OpenAI Recapitalization”). We have an investment of approximately 27 percent of OpenAI on an as-converted basis accounted for under the equity method of accounting. As a result of the OpenAI Recapitalization, we had a decrease in our proportionate ownership of OpenAI and recorded a dilution gain in other income (expense), net. Refer to Note 3 – Other Income (Expense), Net for additional information. We calculate our equity method income or loss using the hypothetical liquidation at book value (“HLBV”) method because our liquidation rights and priorities differ from our underlying ownership interest. Under the HLBV method, we recognize income or loss based on the change in the amount we would receive if the net assets of the investee were distributed at book value. We have made total funding commitments of $ 13 billion, of which $ 11.7 billion h
We are regularly under audit by tax authorities in different jurisdictions. Although we believe that our provision for income taxes and our tax estimates are reasonable, tax authorities may disagree with certain positions we have taken. In addition, economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. We are currently under IRS audit for prior tax years and have received Notices of Proposed Adjustment (“NOPAs”) from the IRS for the tax years 2004 to 2013. 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. The final resolution of the proposed adjustments, and other audits or litigation, may differ from the amounts recorded in our consolidated financial statements and adversely affect our results of operations in the period or periods in which that determination is made.
On September 16, 2024, our Board of Directors approved a share repurchase program authorizing up to $ 60.0 billion in share repurchases. This share repurchase program commenced in April 2025, following completion of the program approved on September 14, 2021, has no expiration date, and may be terminated at any time. As of December 31, 2025, $ 47.4 billion remained of this $ 60.0 billion share repurchase program.
E12
Open in filing
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Informational only. Not investment advice.