Microsoft FY2026 Earnings: The $133B Profit Machine Now Spends $116B a Year on AI Infrastructure

On July 29, 2026, Microsoft Corporation closed its fiscal year ended June 30, 2026 with a number that would have been unthinkable a decade ago: $133.7 billion in net income on $331.8 billion in revenue, up 18%. Azure crossed $100 billion in annual revenue for the first time. And to get there, Microsoft spent $115.9 billion building AI infrastructure — nearly double the prior year and almost 35 cents of every revenue dollar. One year after becoming the first software company to earn $100 billion in a single year, Microsoft earned a third more — while simultaneously running the heaviest capital-spending program in its history. This is what compounding looks like when a monopoly finds a larger market to grow into.

The Headline Numbers​

The full-year print set records on nearly every line. For the twelve months ended June 30, 2026:

Diluted earnings per share were $17.95, up 32%. Two numbers in that table do most of the work. Operating margin expanded 120 basis points to a record 46.8% — extraordinary for a company that nearly doubled its capital budget in the same year. And net income grew 31%, well ahead of the 21% operating-income growth. That gap is important and mostly non-operating: Microsoft's "other income" line swung to a $10.7 billion net gain in FY2026 (from a $4.9 billion net expense in FY2025), driven by mark-ups on its investments in OpenAI ($4.96 billion for the year) and a roughly $3.2 billion gain on its Anthropic stake booked in Q4. Strip those investment gains out and the underlying earnings machine still grew ~21% — the clean signal — but the reported 31% flatters the run rate.

The fourth quarter alone delivered $90.0 billion of revenue (+18%), $40.6 billion of operating income, and $35.8 billion of net income ($4.81 per share). Microsoft returned $10.2 billion to shareholders in the quarter and $48.7 billion for the full year through dividends and buybacks.

Revenue Deep Dive: Three Segments, One Thesis​

Microsoft reports through three segments. The figures below use Microsoft's current segment definitions; the prior-year comparatives are the recast FY2025 numbers Microsoft published alongside these results, so they differ from the segment mix reported a year ago.

Intelligent Cloud ($137.8B, +30%): The engine room. Azure and other cloud services grew 43% year-over-year in the fourth quarter (43% in constant currency), and Azure crossed $100 billion in annual revenue for the first time — a milestone CEO Satya Nadella called out directly. The segment's full-year operating income was $57.0 billion, up from $44.6 billion, as workloads sitting on infrastructure built two to three years ago throw off progressively higher margins. This is the segment the entire capex program is built to feed.

Productivity and Business Processes ($140.0B, +16%): Now the largest segment by revenue and by far the most profitable in absolute terms, generating $83.9 billion of operating income — a ~60% operating margin. Microsoft 365 Copilot, the AI layer embedded across Word, Excel, Teams, and Outlook, surpassed 30 million paid seats, up from roughly 20 million just two quarters earlier. This is the annuity that funds the AI buildout: recurring, pricing-power-rich, and still early in Copilot attach.

More Personal Computing ($54.1B, −1%): The flat-to-down segment. Windows, gaming, and search remain steady cash generators but are no longer the growth story; at $14.4 billion of operating income they fund the enterprise-AI effort rather than lead it. The direction of travel is unmistakable — Microsoft is now overwhelmingly a cloud-and-AI company, with two-thirds of revenue and the overwhelming majority of operating income coming from the commercial cloud.

The Margin Story​

Microsoft's margins over four years show a business absorbing an enormous capital cycle without losing its shape:

Gross margin slipped another 90 basis points to 67.9%, the second consecutive year of compression. The mechanism is the same one that appeared in FY2025: AI compute — GPU and custom-silicon depreciation, energy, and data-center operations — is flowing through cost of revenue faster than the AI revenue premium can offset it. Cost of revenue grew 21% against 18% revenue growth. That is the price of the buildout, and it lands in the gross-margin line first.

Yet operating margin still expanded to a record 46.8%, because Intelligent Cloud's operating leverage and Productivity's ~60% segment margin more than absorbed the drag. The net-margin jump to 40.3% is the one figure to treat with caution: roughly four points of it come from the $10.7 billion of investment gains rather than operations. The honest read on FY2026 is an operating business compounding in the low-20s percent, with a non-operating tailwind from a once-in-a-cycle repricing of Microsoft's AI equity stakes.

The $116 Billion Question: CapEx Goes Vertical​

The single most consequential financial fact about Microsoft in FY2026 is not the profit. It is the spending required to earn it.

Additions to property and equipment reached $115.9 billion — up 79% in a single year, and now nearly 35% of revenue. Including finance leases, fourth-quarter capital spending alone was roughly $41 billion, up 69% year-over-year, and management framed the full year toward the ~$190 billion range once finance leases and large data-center sites are included. Roughly two-thirds of the spend is short-lived assets — primarily CPUs and GPUs — with the remainder in long-duration data-center shells, power, and networking.

The scale is easier to grasp on the balance sheet. Net property, plant, and equipment jumped from $205 billion to $313 billion in twelve months — a $108 billion increase, larger than the entire PP&E base Microsoft carried as recently as FY2023. Cash and short-term investments fell to $76.8 billion from $94.6 billion, and cash on hand dropped to $20.9 billion from $30.2 billion, as even record operating cash flow of $182.9 billion could not fully cover $116 billion of capex plus $48.7 billion of shareholder returns without drawing down the balance sheet.

This is the defining tension of the print. Microsoft is generating more cash than any software company in history and still spending it faster than it comes in, because it believes the returns on AI-ready capacity justify near-term free-cash-flow compression. The bet is that today's GPU clusters and data centers become tomorrow's Azure and Copilot revenue at 70%-plus incremental gross margins. The risk is payback timing: if AI demand digests more slowly than capacity comes online, $116 billion a year of depreciation starts working against the margin line before the revenue arrives.

Tracking a $332B Company in Plain Text​

One of the most clarifying exercises for any investor is to model a company's finances in Beancount, the open-source double-entry accounting system. Double-entry forces every dollar to reconcile: revenue cannot appear without a matching entry, and no expense disappears without a balance-sheet consequence. It is the opposite of a highlight reel.

We maintain Microsoft's complete FY2020–FY2026 income statements and balance sheets as plain-text Beancount files. The currency unit is MUSD (millions of USD), which keeps the numbers readable while preserving double-entry discipline. Here is the FY2026 income statement as it lives in the ledger — note the Beancount convention: Income accounts carry negative (credit) balances and Expenses carry positive (debit) balances, and the whole transaction must sum to zero:

; FY2026 Income Statement — fiscal year ended June 30, 2026
; 1 MUSD = USD 1,000,000  |  All figures in millions USD
; Check: −331,839 + 106,374 + 35,562 + 34,666 + 32,185 − 10,697 + 133,749 = 0 ✓
 
2026-06-30 * "Microsoft Corporation" "FY2026 Income Statement"
  Income:Revenue                         -331839 MUSD  ; revenue earned (credit)
  Expenses:CostOfRevenue                  106374 MUSD  ; cost incurred (debit)
  Expenses:ResearchAndDevelopment          35562 MUSD  ; cost incurred (debit)
  Expenses:SellingGeneralAdministrative    34666 MUSD  ; cost incurred (debit)
  Expenses:IncomeTax                       32185 MUSD  ; cost incurred (debit)
  Income:OtherNet                         -10697 MUSD  ; net other income — incl. OpenAI + Anthropic gains (credit)
  Equity:Adjustments                      133749 MUSD  ; net income offset (RE set by balance assertion)

Notice Income:OtherNet sitting at −10,697: that single credit line is the $10.7 billion of investment gains that lifted reported net income above the operating trend. In the ledger it is impossible to hide — it has its own account, and it either sums to zero with everything else or the file fails validation.

The balance sheet is maintained with pad + balance directives that assert the filing's verified totals. The one number that tells the whole FY2026 story is property, plant, and equipment:

; Balance Sheet — June 30, 2026
2026-06-29 pad Assets:NonCurrent:PropertyPlantEquipment   Equity:Adjustments
2026-06-30 balance Assets:NonCurrent:PropertyPlantEquipment 313076 MUSD ; $313B — the AI infrastructure bet
 
2026-06-29 pad Assets:Current:Cash                        Equity:Adjustments
2026-06-30 balance Assets:Current:Cash                    20935 MUSD  ; $20.9B — down from $30.2B a year ago
 
2026-06-29 pad Liabilities:NonCurrent:LongTermDebt        Equity:Adjustments
2026-06-30 balance Liabilities:NonCurrent:LongTermDebt   -31067 MUSD
 
2026-06-29 pad Equity:RetainedEarnings                    Equity:Adjustments
2026-06-30 balance Equity:RetainedEarnings               -328265 MUSD

That $313 billion PP&E line — up from $44 billion just six years ago — is the physical manifestation of Microsoft's AI thesis. The complete ledger is open and auditable:

The Six-Year Arc: From Cloud Company to AI Utility​

Line up six fiscal years and the transformation is undeniable:

Revenue has more than doubled in six years, and net income has tripled. But the number that explains the future is PP&E: $44 billion to $313 billion, a 7x increase, with more than half of it added in just the last two years. Total assets crossed $758 billion. Microsoft has quietly become one of the most capital-intensive businesses in technology — closer to a utility building power plants than to the asset-light software company it was in 2020 — and it is doing so while expanding operating margin. That combination is the entire investment case, and the entire risk.

The net-income trajectory is relentless with one asterisk:

The FY2026 acceleration to +31% is real but partly borrowed from investment gains; the durable operating growth underneath is closer to the low 20s. Either way, the compounding base keeps rising.

The Verdict: Bull vs. Bear​

The Bull Case:

• Azure crossed $100 billion in annual revenue and grew 43% in Q4 (43% constant currency) — the AI cloud is accelerating, not plateauing, and the segment now throws off $57 billion in annual operating income.
• Operating income grew 20.8% to $155.2 billion while capex nearly doubled — the core business funds the buildout and still expanded operating margin to a record 46.8%.
• Microsoft 365 Copilot passed 30 million paid seats, up from ~20 million two quarters earlier, against a commercial base of 400M+ seats — the upsell is scaling and penetration is still low.
• The balance sheet remains fortress-grade: $76.8 billion in cash and short-term investments against $40 billion of total debt, and $182.9 billion of operating cash flow covered $116 billion of capex plus $48.7 billion of shareholder returns.
• Net income of $133.7 billion self-funds the largest infrastructure program in software history with no dilution.

The Bear Case:

• Reported net-income growth of 31% is flattered by $10.7 billion of non-operating investment gains (OpenAI ~$4.96B, Anthropic ~$3.2B); the operating run rate grew closer to 21%, and those marks can reverse in a down market.
• Capex hit 34.9% of revenue and management guided toward ~$190 billion including finance leases — free cash flow is being consumed by an arms race whose payback timing is unproven.
• Cash fell to $20.9 billion from $30.2 billion as even record operating cash flow could not cover capex plus buybacks and dividends — the spend now outruns the cash engine.
• Gross margin compressed again to 67.9% (−0.9pp) as AI compute depreciation hits cost of revenue ahead of the revenue premium; a second straight year of compression is a trend, not a blip.
• The $108 billion one-year jump in PP&E means depreciation will step up sharply in FY2027 regardless of demand — if AI workloads digest slowly, that expense lands before the offsetting revenue does.

Our Take: Microsoft is executing the most expensive infrastructure bet in software history, and its P&L is absorbing it without visible strain. A record 46.8% operating margin while capex runs at 35% of revenue is the whole thesis compressed into two numbers. The investment gains are noise; the signal is $155 billion of operating income and Azure past $100 billion. The real question is not the balance sheet — it is payback timing on $116 billion a year of compute. But of everyone making the AI infrastructure bet, Microsoft alone pairs it with a monetization surface — Azure, Copilot, and the OpenAI relationship — large enough to absorb the depreciation. The first software company to earn $100 billion just earned $133 billion, and it is spending like it intends to earn far more. The compounding is not done.