Company Overview
MICROSOFT CORPORATION (NASDAQ: MSFT), founded in 1975 and headquartered in Redmond, Washington, builds and sells cloud platforms, enterprise software, developer tools, advertising and gaming services, and PCs/devices for consumers and businesses. Its operations report in three engines: Productivity & Business Processes (Microsoft 365 apps like Word, Excel, Teams; Exchange/Outlook; SharePoint; OneDrive; Dynamics 365 SaaS; LinkedIn’s talent, marketing and learning products), Intelligent Cloud (Microsoft Azure IaaS/PaaS, AI services, databases, analytics; enterprise support/consulting; Windows Server), and More Personal Computing (Windows OEM/licensing; Surface PCs and accessories; Bing/Microsoft Advertising; Xbox content, Game Pass subscriptions, and first-party studios including Activision Blizzard and Bethesda). Revenue is primarily subscription or usage-based: Microsoft 365 and Dynamics per-seat licenses; Azure consumption; GitHub and Copilot subscriptions (AI assistants embedded across Microsoft 365, GitHub, Azure and Windows); Xbox digital content and subscriptions; LinkedIn ads and premium plans; Windows OEM royalties to PC makers. The company runs a global cloud with 60+ Azure regions and sovereign clouds (e.g., Azure Government, Azure China), serves enterprises, SMBs, developers, public sector, and consumers across most countries, and employs ~228,000 people. Scale highlights include over 1 billion LinkedIn members, the GitHub developer network in the hundreds of millions, and a gaming ecosystem spanning consoles, PC, mobile, and cloud streaming.
Business Model
Microsoft generates revenue through three reporting segments that bundle products and services sold largely as recurring subscriptions, consumption-based cloud usage, software licenses, advertising, and hardware. Productivity and Business Processes is the largest contributor ($120.8 billion in FY25), anchored by Microsoft 365 Commercial, which sells per-user subscriptions that combine Office apps, Teams, security/management and now Copilot; growth comes from seat expansion in small/medium business and upsell to higher-value suites. In the June quarter (Q4 FY25), segment revenue was $33.1 billion, up 16% year over year, with Microsoft 365 Commercial products and cloud services up 16% (Commercial cloud up 18%), reflecting both usage and mix-shift to premium tiers. Consumer subscriptions add a durable retail revenue stream: Microsoft 365 Consumer revenue rose 21% in Q4 as subscribers increased 8% to 89.0 million, aided by early 2025 price actions. LinkedIn continues to monetize hiring, marketing, and learning tools on a subscription and ad basis (revenue up 9% in Q4). Dynamics sells ERP/CRM software and cloud services; Dynamics products and cloud services rose 18% in Q4, with cloud-native Dynamics 365 up 23%, underscoring the shift from on-premises licenses to SaaS. Intelligent Cloud ($106.3 billion in FY25) captures the company’s infrastructure and developer platform economics. Azure—and related services such as databases, AI, analytics, app services, and security—monetizes on a metered, consumption basis that scales with customer workloads; “server products and cloud services” also include Windows Server, SQL Server, GitHub, and other offerings sold as subscriptions and licenses. In Q4 FY25, segment revenue reached $29.9 billion, up 26%; server products and cloud services rose 27%, driven by Azure and other cloud services up 39%, reflecting heavier AI training/inference, data, and migration workloads. Management highlighted Azure surpassing a $75 billion annual revenue run-rate in FY25, reinforcing the platform’s centrality to Microsoft’s growth narrative and its mix of high-margin platform services offset by capital-intensive data center investments. More Personal Computing ($54.6 billion in FY25) comprises Windows, devices, gaming, and search. Windows OEM licenses monetize PC shipments via per-device licensing to manufacturers, while Windows Commercial (sold within enterprise agreements and Microsoft 365) monetizes via annuity subscriptions and Software Assurance. Devices (primarily Surface and accessories) contribute transactional hardware revenue with lower margins and cyclical demand. Gaming blends hardware and content economics: Xbox content and services revenue (digital game sales, in-game purchases, and subscriptions like Game Pass) rose 13% in Q4; hardware is more volatile and typically lower-margin. Search and news advertising (principally Bing and Microsoft Start) sells performance and brand ads; ex-TAC, it increased 21% in Q4 as integration of Copilot and Edge deepens engagement. Overall, Q4 segment revenue was $13.5 billion, up 9%, with Windows OEM/Devices up 3% as the PC market stabilizes ahead of the Windows 10 end-of-support cycle and an emerging refresh tied to AI-PC features.
Quarterly Review
On the top line, Microsoft’s last four completed fiscal quarters (FY25 Q1–Q4; quarters ended September 30, 2024; December 31, 2024; March 31, 2025; and June 30, 2025) show broad-based double-digit growth, paced by Azure and steady expansion in Microsoft 365, with episodic lifts from advertising and Gaming. Revenue was $65.6 billion in Q1 (+16% year over year), $69.6 billion in Q2 (+12%), $70.1 billion in Q3 (+13%), and $76.4 billion in Q4 (+18%). Microsoft Cloud revenue increased each quarter—$38.9B, $40.9B, $42.4B, and $46.7B respectively—reflecting strong Azure demand: Azure and other cloud services grew ~33% in Q1, ~31% in Q2, ~33% in Q3, and accelerated to ~39% in Q4. Intelligent Cloud segment revenue moved in tandem ($24.1B, $25.5B, $26.8B, $29.9B; +20%, +19%, +21%, +26% YoY), with Server products and cloud services consistently comping above 20%. Productivity & Business Processes delivered durable teens growth as Microsoft 365 Commercial products and cloud services rose +13% in Q1, +15% in Q2, +11% in Q3, and +16% in Q4 (Commercial cloud subcomponent +15%, +16%, +12%, +18%); Dynamics 365 also ran in the mid-to-high teens across the period. More Personal Computing, the laggard segment, stabilized: Windows OEM was +2% in Q1, +4% in Q2, +3% in Q3, and +3% in Q4, while Devices remained subdued. Two notable swing factors helped: Search and news advertising ex-TAC advanced +18% in Q1 and +21% in Q2, Q3, and Q4; and Gaming’s year-ago Activision consolidation produced a one-time step-up (+61% in Q1, with ~53 points from the acquisition), then normalized to +2% in Q2, +8% in Q3, and +13% in Q4 as content and services grew off a larger base. FX modestly weighed on Q3 (management cited a ~2-point headwind to revenue). Overall, the pattern is clear: Azure’s high-30s growth in Q4, paired with resilient Microsoft 365 seat expansion and ARPU gains, did the heavy lifting, while advertising and a steadier PC ecosystem added incremental tailwinds. On the bottom line, EPS stepped up from $3.30 in Q1 (+10% YoY) to $3.23 in Q2 (+10%), $3.46 in Q3 (+18%), and $3.65 in Q4 (+24%), with operating income rising faster than revenue in three of the four quarters as the company leveraged scale in sales and R&D while absorbing elevated AI infrastructure costs. Gross margin dollars increased each quarter, but the Microsoft Cloud gross margin percentage compressed sequentially into Q3—management disclosed cloud GM of ~71% in Q1, ~70% in Q2, and ~69% in Q3—reflecting accelerated capex deployment, higher power and depreciation tied to AI infrastructure, and early-stage Copilot usage costs; despite this mix headwind, operating income grew double digits in every quarter due to high-margin software subscriptions and disciplined opex growth (opex +12% in Q1 with a Gaming-related mix, +5% in Q2, +2% in Q3). Segment profit mix helped: Intelligent Cloud operating income expanded on Azure scale even as unit margins tightened; Productivity & Business Processes contributed outsized profit growth from Microsoft 365 Commercial (license mix shift to E5, security add-ons, and Copilot attach beginning late in the period); More Personal Computing stabilized as Windows OEM recovered and content/ads monetization improved. Q4 delivered the cleanest operating leverage: revenue +18% with operating income +23% and EPS +24%, aided by Azure’s acceleration and stronger ad growth, while Gaming comps normalized and Windows stayed slightly positive. Net income tracked EPS closely, with no recurring below-the-line distortions. FX trimmed Q3 EPS by roughly a nickel, but otherwise currency was not a narrative driver. In sum, EPS growth was driven by Azure scale economics and steady Microsoft 365 monetization overcoming intentional AI gross-margin investment; the inflection in Q4 underscores that the AI capex drag has not prevented earnings expansion, given robust top-line velocity and tight control of operating expense growth.
Yearly Review
On the top line, Microsoft’s revenue advanced from $198.3 billion in FY2022 to $211.9 billion in FY2023 (+6.9%), $245.1 billion in FY2024 (+15.7%), and $281.7 billion in FY2025 (+14.9%), with the step-ups in FY2024–25 overwhelmingly driven by cloud and, secondarily, by Gaming and search. In FY2025, Intelligent Cloud rose 21% to $106.3 billion as Server products and cloud services reached $98.4 billion, propelled by Azure and other cloud services revenue growth of 34% as AI-related consumption scaled; Microsoft noted gross margin growth led by Azure even as AI infrastructure spending tempered percentage margins. Productivity & Business Processes climbed 13% to $120.8 billion, led by Microsoft 365 Commercial products and cloud services (+$10.8 billion, +14%), with Microsoft 365 Commercial cloud up 15% on 6% seat growth and ARPU gains; Microsoft 365 Consumer grew 11% with subscribers to 89.0 million after a January 2025 price increase. More Personal Computing added 7% to $54.6 billion on Gaming (+$2.0 billion, +9%; content & services +16% on Activision and Game Pass) and search & news advertising (+20% ex-TAC), partly offset by Devices and a 25% drop in Xbox hardware units; Windows OEM/Devices edged up 3% as the PC market stabilized ahead of Windows 10 end-of-support. In FY2024, revenue rose 16% on Azure (+30%) within Intelligent Cloud (+20% to $105.4 billion), Office 365 Commercial (+16%) within Productivity & Business Processes (+12% to $77.7 billion), and Gaming (+39%, with 44 points of content/services growth from the Activision Blizzard acquisition closed October 2023) within More Personal Computing (+13% to $62.0 billion). FY2023 was a slower year as PC demand normalized and ad markets softened, but Microsoft still grew to $211.9 billion on resilient Microsoft 365 and Azure expansion; FY2022’s $198.3 billion reflected broad-based growth across all segments from Microsoft 365 Commercial, LinkedIn, Dynamics 365, Azure and Windows. Together, these dynamics yielded a four-year revenue CAGR of ~12%, with Azure and Microsoft 365 as the primary compounding engines and Gaming/advertising acting as incremental boosters in FY2024–25 as Activision was absorbed and search volume rose. On the bottom line, diluted EPS moved from $9.65 in FY2022 to $9.68 in FY2023 (+0.3%), then accelerated to $11.80 in FY2024 (+21.9%) and $13.64 in FY2025 (+15.6%). The muted FY2023 compares reflect a $1.2 billion restructuring charge taken in Q2 (severance, hardware portfolio impairments, lease consolidation) and a higher effective tax rate versus FY2022, which itself benefited from a $3.3 billion tax gain tied to an intangible property transfer; excluding these effects, the multi-year earnings algorithm was already intact. In FY2024, operating income jumped 24% to $109.4 billion as gross margin rose 17% on cloud and Gaming mix (Activision added roughly 10 points to More Personal Computing gross margin growth), while operating expense growth was held to 7% as the prior-year charge rolled off; the effective tax rate eased to 18% (from 19%) on IRS/Treasury foreign tax credit guidance, and other income (expense) swung negative on higher interest expense and equity method losses but did not derail EPS expansion. In FY2025, operating income advanced another 17% to $128.5 billion on scale efficiencies in Microsoft 365 Commercial and Azure despite AI infrastructure costs; net income rose 16% to $101.8 billion even as other income (expense) deepened to a $4.9 billion loss (vs. $1.6 billion loss in FY2024) and the tax rate ticked up to 17.6% (implied). Segment-level profitability widened: FY2025 operating income reached $69.8 billion in Productivity & Business Processes (+17%), $44.6 billion in Intelligent Cloud (+18%), and $14.2 billion in More Personal Computing (+18%). Share count was stable (diluted shares ~7.47 billion) as buybacks largely offset employee issuance; dividends climbed to $3.32 per share. Net, EPS growth over four years stems from mix shift to higher-margin cloud subscriptions (Microsoft 365, Azure), operating leverage from at-scale cloud platforms, disciplined opex growth post-FY2023 restructuring, and a benign tax backdrop in FY2024–25—partly tempered by heavier AI capex flowing through cost of revenue and higher net other expense.
Catalysts
Windows 10’s end of support on October 14, 2025 is the nearest, clearest catalyst. It forces enterprises and consumers to choose among upgrading devices to Windows 11, paying for Extended Security Updates (ESU), or moving workloads to cloud PCs—each path with revenue implications. Microsoft’s own lifecycle notices confirm the cutoff, with ESU programs offered for those who cannot migrate immediately; this is poised to lift Windows OEM and Commercial revenue as PC fleets refresh and drive attach of Microsoft 365 and security SKUs. Near term, the mix shift toward AI PCs should also support average selling prices and Windows Commercial cloud ARPU, while the ESU bridge monetizes laggards and smooths the transition for regulated and compatibility-constrained environments. Azure AI capacity remains the dominant medium-term driver—and constraint. Management has signaled a step-function increase in capital expenditures to stand up “planet-scale” AI infrastructure, with Q1 FY26 press and coverage highlighting capex approaching mid-$30 billions this quarter alone as Microsoft races to add datacenter shells, power, and accelerators. The company is deploying its first-generation custom AI silicon (Maia 100) to diversify supply, reduce unit cost, and optimize for inference/training latency; press and technical briefings outline the chip’s design for Azure’s largest AI workloads. However, reporting around Maia 200 points to production timing slipping into 2026, a potential headwind if third-party GPU supply remains tight. On the demand side, Azure and other cloud services grew at 30%+ in FY25, with management repeatedly tying growth to AI workloads—yet also acknowledging Azure is “short on capacity,” which caps near-term revenue until new capacity lands. Monetization of Copilot across commercial and consumer is the next large lever. Microsoft 365 Copilot is now a listed, per-user add-on across enterprise plans, and the company introduced Microsoft 365 Premium for individuals on October 1, 2025—consolidating consumer AI value into a higher-ARPU bundle. The 10-K folds Copilot into Microsoft 365 Commercial metrics, underscoring its role in seat growth and mix, while earnings remarks through FY25-Q4 and FY26-Q1 repeatedly cite AI contribution to bookings and revenue per user. On the developer side, GitHub Copilot’s user base expanded markedly in 2025, reinforcing a second monetization vector inside the Productivity and Intelligent Cloud segments via GitHub and Azure usage. The net effect: a multi-product AI subscription stack whose adoption translates into higher ARPU, expansion into non-information worker cohorts, and incremental Azure consumption for inference. Security is both catalyst and risk. The U.S. Cyber Safety Review Board’s 2024 report criticized Microsoft’s security posture in a high-profile cloud incident, and CISA advisories in 2024 flagged additional nation-state activity—issues that can affect enterprise trust, win rates in regulated sectors, and near-term cost to implement Microsoft’s Secure Future Initiative. Management has published progress mappings against CSRB recommendations; sustained execution that measurably reduces incidents and improves default protections would support premium security bundle growth and preserve Azure’s credibility for sensitive workloads. Conversely, any repeat of material breaches would be an overhang on commercial momentum. Regulatory outcomes are a continuing external swing factor. In the EU, Teams unbundling from Microsoft 365 and ongoing DMA compliance for Windows and LinkedIn reduce fine risk but could pressure EU seat mix and limit cross-sell synergies; at the same time, transparency and product changes help close investigations and stabilize the operating environment. The FY2025 10-K codifies these obligations and disclosures, while Commission materials and Microsoft’s own DMA compliance reports frame the scope and timelines. The base case is modest revenue friction in affected regions offset by the strategic upside of regulatory certainty and continued AI monetization across the global installed base. Gaming provides an additional, more volatile catalyst. After closing Activision Blizzard, Microsoft’s gaming revenue mix tilts toward content and services, with subscription growth in Game Pass offset by cyclical first-party releases and hardware softness. FY26-Q1 commentary pointed to content and services resilience despite weaker console units; the medium-term vector is integration of ABK franchises into subscription, PC cross-sell, and cloud streaming reach. Execution on release cadence and pricing will determine whether gaming becomes a steadier contributor or remains a portfolio swing.
Risks
Near-term margin and cash-flow pressure from AI infrastructure build-out. Microsoft’s Q1 FY26 call disclosed $34.9 billion of quarterly capex, with roughly half for short-lived GPUs/CPUs and $11.1 billion in finance leases for large datacenter sites; company gross margin was 69%, “down slightly” year over year due to scaling AI infrastructure. Management also signaled an unprecedented build—an >80% increase in AI capacity this year and a plan to roughly double datacenter footprint over two years—amplifying depreciation, lease, and power costs before full monetization. Contractual obligations underscore the load: $32.1 billion construction commitments, $178.7 billion leases, and $110.0 billion purchase commitments concentrated in datacenters. Power, land, and supply-chain constraints that can delay capacity and dilute ROI. Management’s emphasis on “tokens per dollar per watt” and the scale of planned sites highlights execution risk tied to electricity availability and grid lead times; external industry analyses flag power bottlenecks as a gating factor for hyperscale builds across the Americas, with knock-on effects on timelines and input costs. Any delay pushes revenue ramps right while sustaining opex and lease expense, compressing incremental returns on capital. Regulatory/antitrust remedies that reshape product packaging and pricing latitude. In September 2025, the European Commission accepted legally binding commitments addressing Teams tying concerns, including multi-year obligations (seven to ten years) around unbundling, interoperability, and data portability. These remedies can restrain bundling synergies in Microsoft 365, complicate SKU strategy globally, and create compliance cost and precedent risk as other jurisdictions scrutinize similar behaviors. Concentration and counterparty risks in AI models and partnerships. Microsoft announced a new definitive agreement with OpenAI, citing ~$250 billion of contracted Azure services and continued API/IP exclusivity through at least 2030 (with certain rights extended to 2032). While strategically powerful, this embeds sizable concentration in one model supplier and usage pattern; any governance, safety, pricing, or reputational issues at a key partner could propagate into Azure AI demand, Copilot roadmaps, and content indemnities. Microsoft’s 10-K also describes rights around OpenAI IP and a right of first refusal on new capacity—valuable, but reinforcing dependence. AI legal exposure—copyright, data, and safety. The 10-K explicitly warns that AI systems could trigger legal liability, regulatory action, and brand harm, including “current copyright infringement and other claims arising from AI training and output.” Potential outcomes include royalty-bearing licenses on worse terms, product changes, or damages/indemnities. As AI features pervade Microsoft 365, GitHub, Windows, Security, and Dynamics, the surface area for such claims—and associated COGS (model costs), opex (legal/compliance), and product constraints—expands. Tax and transfer-pricing disputes with material downside. Microsoft remains under IRS audit for 2004–2013 and has received NOPAs seeking an additional $28.9 billion plus penalties and interest related to intercompany transfer pricing. Outcomes may differ from amounts recorded; adverse resolution would affect results in the period determined. Separately, the company flagged a remaining $4.4 billion TCJA transition-tax installment due in Q1 FY26—modestly affecting near-term cash flows. Geopolitics, supply chain, and China exposure. The 10-K notes sanctions, trade controls, and FX volatility as headwinds, which are salient as Microsoft adjusts China operations and manufacturing footprints amid U.S.–China tensions (e.g., Wicresoft changes and reported diversification of hardware and server production). Disruptions can impair demand, complicate public-sector sales, and raise costs, with FX swings further pressuring reported growth and margins. Cybersecurity threat environment and source-code/IP risks. While Microsoft states no cybersecurity risks have “materially affected” it as of the filing date, it underscores an “increasingly challenging” environment. The company highlights that source-code leaks or IP compromise could erode competitive advantage and heighten security risks; remediation actions themselves can cause outages or data loss. Given Microsoft’s role in identity, security, and sovereign cloud, incident severity could have outsized operational and reputational impact.
Recent Updates
Microsoft and OpenAI signed a definitive agreement on October 28 that materially reshapes the partnership. OpenAI will restructure into a public benefit corporation (PBC) valued at roughly $500 billion, and Microsoft’s investment converts into about a 27% stake worth approximately $135 billion. Microsoft retains frontier-model partnership status and extends key IP rights and Azure API exclusivity until at least 2032, with an independent expert panel to validate any AGI declaration. OpenAI also contracted to purchase about $250 billion of Azure services while gaining the ability to work with select third parties on non-API products; Microsoft relinquishes its prior right of first refusal on OpenAI compute but can independently pursue AGI. The agreement both deepens product alignment (securing OpenAI workloads for Azure at massive scale) and loosens competitive constraints (allowing each side to diversify partners), with obvious implications for Microsoft’s cloud bookings, capital planning, and long-term AI roadmap. On October 29, Microsoft reported fiscal Q1 2026 results that underscored sustained AI-driven demand. Revenue came in around $77.7 billion, up roughly 18% year over year, with Azure growth near 40% powering Intelligent Cloud. Operating income rose to about $38 billion and net income to roughly $27.7 billion. Management framed the quarter as another proof point that copilots and AI infrastructure are converting into revenue across the stack: consumption growth, larger AI training and inference commitments, and early seat expansion for paid copilots. The flip side is elevated capital intensity—management has telegraphed heavy outlays for GPUs, custom silicon, and power capacity—so investors should expect continued capex pressure even as AI-related commitments (now including OpenAI’s) support visibility on utilization. European regulatory overhang eased on September 12 when the European Commission accepted Microsoft’s legally binding commitments on Teams bundling. Effective November 1, new customers worldwide can again purchase Microsoft 365/Office 365 suites that include Teams, alongside versions without Teams; there are additional licensing and pricing adjustments to address competition concerns. The resolution reduces the risk of fines and clarifies the commercial playbook for Modern Work globally. Near-term revenue impact should be limited (customers can still buy with or without Teams), but the decision removes uncertainty around packaging and supports steadier enterprise deal cycles in EMEA. In Gaming, Microsoft overhauled Xbox Game Pass on October 1, introducing Essential, Premium, and Ultimate tiers and raising Ultimate by 50% to $29.99 per month. The richer Ultimate bundle now features a larger library, 75+ day-one releases annually, Ubisoft+ Classics, Fortnite Crew, and upgraded cloud streaming. Strategically, the move aims to lift ARPU, align pricing with content costs (notably after Activision Blizzard integration), and accelerate cloud play. The risks are churn at the low end and continued hardware softness, but the tiering clarifies positioning: Premium trades immediate day-one access for price, while Ultimate captures heavy users and cloud-first gamers. Finally, Microsoft’s custom AI silicon timeline remains a watch item. Reports in late June indicated the next-gen Maia accelerator (code-named Braga) has slipped to 2026 from 2025, with performance expected to trail Nvidia’s Blackwell. A delay keeps Microsoft more reliant on Nvidia in the near term and could temper margin aspirations tied to in-house silicon. Combined with record-level data-center buildouts, the silicon cadence will be central to unit economics: every quarter of slippage sustains higher cost of compute, even as AI demand, multi-year cloud commitments, and the expanded OpenAI agreement support throughput and revenue growth.